There are many factors to consider when selling your home. An important one is whether you’ll have to pay short or long-term capital gains taxes. In this blog, you will find valuable information about capital gains taxes.
The Facts:
Depending on how much your home appreciates, you may be required to pay long-term capital gains tax on the profit. Yet, thanks to the Taxpayer Relief Act of 1977, most people are exempt. If you are single, you will not have to pay capital gains on the first $250,000 profit. If you are married, that number increases to $500,000. There are a few key requirements that you need to keep in mind:
- Capital gains exemption is only for a primary residence
- You are only allowed to take the exemption once every two years
- You must have lived in the house for two out of the last five years
Some other noteworthy information is that if you sell your home within one year of purchasing, you will be required to pay short-term capital gains tax. See Chart B below for the income and taxation levels.
The Details:
The 2-in-5-Year Rule:
This Rule comes into play when a person owns more than one home. To qualify for the exemption, a person must live in the home for two out of the last five years. However, the two years do not need to be consecutive. For example, you buy and move into a home for one year, rent it out for the next three years, then move back into the house for another year. After five years, you sell the property and can qualify for the exemption, holding all else constant.
How the Tax is Calculated:
Long-term capital gains tax applies only to the profit after $250K or $500K of the home sale. For example, a single person who makes $50,000/year purchases a home for $300,000 and sells it for $600,000 five years later. They would be required to pay 15% capital gains on $50,000. ($300,000 [profit] – $250,000).
As mentioned above, you’re required to pay short-term capital gains taxes on any asset held for under one year. For example, a married couple makes a total household income of $150,000/year. They buy a home for $400,000 and sell it for $500,000 in 10 months. They would be required to pay a 22% tax on $100,000.
CHART A: Long-Term Capital Gains Taxation Rates
| Filing Status | 0% Tax Rate | 15% Tax Rate | 20% Tax Rate |
| Single | < $41,675 | $41,675 to $459,750 | > $459,750 |
| Married filing jointly | < $83,350 | $83,350 to $517,200 | > $517,200 |
| Married filing separately | < $41,675 | $41,675 to $258,600 | > $258,600 |
| Head of household | < $55,800 | $55,800 to $488,500 | > $488,500 |
CHART B: Short-Term Capital Gains Taxation Rates
| Tax Rate | 10% | 12% | 22% | 24% | 32% | 35% | 37% |
| Filing Status | Taxable Income | ||||||
| Single | Up to $9,950 | $9,951 to $40,525 | $40,526 to $86,375 | $86,376 to $164,925 | $164,926 to $209,425 | $209,425 to $523,600 | Over $526,601 |
| Head of household | Up to $14,200 | $14,201 to $54,200 | $54,201 to $86,350 | $86,351 to $164,900 | $164,901 to $209,400 | $209,401 to $523,600 | Over $523,600 |
| Married filing jointly | Up to $19,900 | $19,901 to $81,050 | $81,051 to $172,750 | $172,751 to $329,850 | $329,851 to $418,850 | $418,851 to $628,300 | Over $628,301 |
| Married filing separately | Up to $9,950 | $9,951 to $40,525 | $40,526 to $86,375 | $86,376 to $164,925 | $164,926 to $209,425 | $209,426 to $314,150 | Over $314,151 |