{"id":3116,"date":"2023-07-14T07:47:06","date_gmt":"2023-07-14T11:47:06","guid":{"rendered":"https:\/\/www.deeds.com\/articles\/?p=3116"},"modified":"2024-04-25T23:17:35","modified_gmt":"2024-04-26T03:17:35","slug":"selling-your-home-for-a-handsome-profit-this-year-are-capital-gains-tax-an-issue","status":"publish","type":"post","link":"https:\/\/www.deeds.com\/articles\/selling-your-home-for-a-handsome-profit-this-year-are-capital-gains-tax-an-issue\/","title":{"rendered":"Selling Your Home for a Handsome Profit This Year? Is Capital Gains Tax an Issue?"},"content":{"rendered":"\n
\"\"<\/figure>\n\n\n\n

After the phenomenal real estate market<\/a> of the past few years, those who\u2019d like to sell could reap significant capital gains over and above what they originally paid for their homes. Those who sell should know how the Internal Revenue Service will tax those profits.<\/p>\n\n\n\n

From time to time we hear the federal government will modify the tax law\u2019s breaks for capital gains. But any such change would only apply to very high-income homeowners. The law continues to be seller-friendly. Therefore, most home sellers do not owe taxes on their home sale profits.<\/p>\n\n\n\n\n\n\n\n

Selling Your Home? You Probably Won\u2019t Owe Taxes on Your Profit<\/h2>\n\n\n\n

From 2020 through 2022, home values shot up remarkably. In 2023, sellers aren\u2019t calling the shots so much, and homes seem poised to appreciate at a rate we consider more normal: around 5% per year. By now, many home buyers are sitting on a lot of equity and can sell at a profit.<\/p>\n\n\n\n

\u261b<\/em> Read more about patterns in real estate prices, and how a <\/em><\/strong>home\u2019s value<\/em><\/strong><\/a> can help you save for the future.<\/em><\/strong><\/p>\n\n\n\n

Yet sellers of homes they owned and lived in for at least two years won’t pay capital gains tax on a 2023 sale if their individual taxable income was $44,625 or less. (Double that for married joint filers or an eligible surviving joint filer.) Check IRS Publication 523, on selling a home<\/a>, for updates each year. People who earn more would be taxed at the 15% rate, but\u2026<\/p>\n\n\n\n

There\u2019s a capital gains exclusion for sales of real property allowing a seller to avoid paying federal tax on any gain. Whew! Once in every two-year period, you can sell your primary residence while excluding up to $250,000 in profit from federal taxes. <\/strong>Note that the exclusion applies only to a primary residence you\u2019ve lived in for at least two of the five years before you sold.<\/p>\n\n\n\n

In other words: Say your home sale brings a profit under $250,000 (or $500,000 for a couple filing jointly). This is true for most people, so most do not face a capital gains tax. For profits over that exclusion threshold, there\u2019s a scale based on income. According to the IRS, the tax rate on capital gains will not exceed 15% for most people. <\/p>\n\n\n\n

So far, so good.<\/p>\n\n\n\n

\u261b <\/em>Homeowners must also check their state\u2019s tax rules. Here\u2019s where you can check the <\/em><\/strong>tax rate your state applies to capital gains<\/em><\/strong><\/a>.<\/em><\/strong><\/p>\n\n\n\n

Short-Term or Long-Term?<\/h2>\n\n\n\n
\"\"<\/figure>\n\n\n\n

If you don\u2019t hold for two years, what then? Homes, like other capital assets, are taxed based on how long they\u2019re held before a profitable sale.<\/p>\n\n\n\n

Most sellers<\/a> need to have held the home as a personal residence for at least two years of the past five (up to the closing date) to qualify for long-term gains.<\/p>\n\n\n\n

Profits on assets held up to one year are short-term capital gains, taxed as regular income. Profits on assets held over a year get the lower long-term gain rate. The IRS has the scoop in its fact sheet on capital gains and losses<\/a>.<\/p>\n\n\n\n

\u261b <\/em>Did you <\/em><\/strong>sell an inherited home<\/em><\/strong><\/a>? Note the special tax rules for your situation. Check your <\/em><\/strong>state\u2019s tax rules<\/em><\/strong><\/a> too!<\/em><\/strong><\/p>\n\n\n\n

We should point out that not everyone has to meet a length-of-residency minimum. There are special rules for deed holders who transfer their rights because of a divorce. Deployed personnel also have special rules allowing easier eligibility for capital gains tax breaks. If you must sell before two years, you may still be eligible for a portion<\/em><\/a> of the exclusion.<\/p>\n\n\n\n

\u261b<\/em><\/strong> Rentals and other investment properties don\u2019t get the capital gains exclusion. A separate provision applies for deferring capital gains by reinvesting. See: <\/em><\/strong>For Property Investors: Six Steps to a 1031 Exchange<\/em><\/strong><\/a>.<\/em><\/strong><\/p>\n\n\n\n

The rule that the property must be owner-occupied means a total of two years in the past five \u2014 they need not be two continuous years. Note: Gains during the time a property was rented out would still be subject to income tax.<\/p>\n\n\n\n

Nuts and Bolts of Taxes<\/h2>\n\n\n\n

When you close your sale, you receive IRS Form 1099-S<\/a>, Proceeds from Real Estate Transactions, from the lender or real estate agent for reporting the proceeds. If you can exclude your profit from capital gains tax, as most people can, advise your agent by Feb. 15 of the following year. If you sell a home in 2023<\/a>, according to the IRS: \u201cThe due date for furnishing statements to recipients\u201d for Form 1099-S \u201cis February 15, 2024.\u201d Lenders or real estate agents need to file a Form 1099-S, with the IRS only if you can\u2019t exclude your taxable gain<\/a> on your income tax return.<\/p>\n\n\n\n

How do you report a gain or loss from the sale of your primary residence?<\/p>\n\n\n\n