Capital gains tax on real estate and home sales

Selling your home is a process, and it may not end with closing. Even after you hand over the keys, in some cases a few tasks may remain, including properly filing and paying your taxes. If you’re thinking about, preparing to or are in the middle of selling your home, it may be helpful to explore the ins and outs of capital gains taxes on home sales. Note the information in this article is not intended to be tax or legal advice. Please consult with your legal and tax professional.

Are there taxes on the sale of a property?

As you gear up to sell your home, you may be wondering what this means as tax season rolls around. Whether you pay taxes often depends on how long you’ve owned your home, what type of residence it is, how much you’re profiting from the sale and how you plan on filing your taxes.

What is capital gains tax on real estate?

In simple terms, capital gains tax is a tax imposed on the profit you make from selling an asset that you own or use for personal or investment purposes, including real estate. When you sell your home for more than you paid for it, the gain may be taxable. The taxable gain or loss is calculated based on the difference between the amount you sell your home for and your adjusted basis in the property (generally, the price you paid to purchase the property plus the cost of certain additions and improvements, or the constructions costs if you contracted to build your home).

When do you pay capital gains tax on real estate?

In most cases, capital gains taxes are paid after a piece of real estate is sold. If a property appreciates in value but isn’t sold, the owner is generally not liable for capital gains tax solely based on the appreciated value of their property. The event that usually triggers a potential capital gains tax is the realization of a gain from the sale of the property.

Capital gains are usually reported in your tax return for the taxable year of the sale, which is filed in the following tax season. For example, if you sold a home in 2023 and realized a capital gain, you will need to report it in your annual tax filings submitted in the spring of 2024. How much you end up paying will likely depend on your tax bracket and how long you’ve held the asset. If you have taxable capital gains, you may be required to make estimated tax payments.

Do you always pay capital gains tax on a home sale?

There may be times when one doesn’t pay capital gains tax on a home sale. If you meet all three of the following criteria then you may not be required to pay capital gains on up to $250,000 of gain on a home sale (if filing as an individual) or up to $500,000 (if filing jointly):

• You’ve owned your home for at least two years out of the last five years before the sale date.
• You’ve used the home as your primary residence for at least two years during the five years prior to the date of your sale.
• You have not filed an exclusion on the gain from the sale of another home sale within two years prior to the sale.

If you’re looking to learn more about potential tax benefits, consider consulting a tax professional.

In summary

Capital gains tax is a tax imposed on the profit from the sale of a property owned or used for personal or investment purposes. Understanding when, and if, capital gains tax impacts your home sale can help you plan your sale and help ensure your finances are organized as both a homeowner and a taxpayer.

Capital gains tax FAQs

How do you calculate capital gains tax on real estate?

Your capital gains taxes are based on the gain or loss you realize from the home sale. If you’re looking to calculate capital gains tax, it’s highly recommended to seek advice from a tax professional to provide an accurate estimate.

How do you report a property sale?

Your taxable gain from the sale of your home may be required to be reported on your federal income tax return. You may also be required to file a state income tax return to report the sale or transfer. If you’re looking to report a property sale, it’s highly recommended to seek advice from a tax professional.

Does capital gains tax apply to inherited real estate?

Yes, capital gains tax may apply to inherited real estate if you sell the property. You will need to determine your basis in the inherited property. Consider contacting a tax professional to learn more.