{"id":997,"date":"2021-05-03T08:02:41","date_gmt":"2021-05-03T14:02:41","guid":{"rendered":"https:\/\/agentstory.com\/a\/?p=997"},"modified":"2021-07-29T22:12:14","modified_gmt":"2021-07-30T04:12:14","slug":"when-are-you-exempt-from-paying-capital-gains-tax-on-your-home","status":"publish","type":"post","link":"https:\/\/agentstory.com\/a\/when-are-you-exempt-from-paying-capital-gains-tax-on-your-home\/","title":{"rendered":"When Are You Exempt from Paying Capital Gains Tax on Your Home?"},"content":{"rendered":"\n<p>You\u2019re <em>this close<\/em> to selling your home! Being under contract sure feels good, doesn\u2019t it? After all the hard work you put in to prepare and showcase your home, closing is just around the corner.<\/p>\n\n\n\n<p>Before you gather your closing paperwork, it\u2019s time to consider your tax situation.<\/p>\n\n\n\n<p>If your buyer made an exceptional or favorable offer, you\u2019ll need to see if you owe capital gains taxes on your home\u2019s sale.<\/p>\n\n\n\n<p>You might be wondering, <em>What is capital gains tax, and do I owe money to the IRS?<\/em><\/p>\n\n\n\n<p>In this article, we\u2019ll help you understand what capital gains are, how they\u2019re taxed, and how to calculate your taxes.&nbsp;<\/p>\n\n\n\n<h2 id=\"what-is-capital-gains-tax\">What Is Capital Gains Tax?<\/h2>\n\n\n\n<p>Capital gains are simply an increase, or your profit, on a personal asset. You won\u2019t pay capital gains taxes until you sell. You\u2019ll pay taxes at the federal level, and most states require the tax as well. The amount of tax you pay depends on the profit you make, your <a href=\"https:\/\/www.nerdwallet.com\/article\/taxes\/capital-gains-tax-rates\" target=\"_blank\" rel=\"noreferrer noopener\">tax filing status, and your tax bracket<\/a>.<\/p>\n\n\n\n<p><strong><em>Long-term capital gains tax<\/em><\/strong>: When you sell an asset like your home after owning it for at least two years, you may owe taxes depending on the profit you make. The tax rates are 0%, 15%, and 20% depending on your unique situation.<\/p>\n\n\n\n<p><strong><em>Short-term capital gains tax<\/em><\/strong>: If you owned your home for less than two years the profit would be taxed like ordinary income. Tax rates range from 10% to 37%.<\/p>\n\n\n\n<h2 id=\"the-rules\">The Rules<\/h2>\n\n\n\n<p>The Tax Relief Act of 1997 made it possible for <strong>single filers to exclude up to $250,000<\/strong>, and for <strong>married tax filers to exclude up to $500,000<\/strong> of their capital gains. To <a href=\"https:\/\/www.irs.gov\/publications\/p523\" target=\"_blank\" rel=\"noreferrer noopener\">qualify for this exemption<\/a>, you\u2019ll need to have lived in the primary residence for at least two out of the last five years. According to <a href=\"https:\/\/www.investopedia.com\/ask\/answers\/06\/capitalgainhomesale.asp\" target=\"_blank\" rel=\"noreferrer noopener\">Investopedia<\/a>, if you own a rental property, you can qualify for an exemption if you have proof that you\u2019ve turned it into a primary residence and meet the residency requirement. You\u2019d be exempt from paying capital gains tax while using the property as a primary residence.&nbsp;<\/p>\n\n\n\n<p><strong><em>Math Examples<\/em><\/strong>:<\/p>\n\n\n\n<ul><li><strong>Example One<\/strong>: Suppose you bought a house for $300,000 and sold it for $450,000 two years later in 2021. Let\u2019s say that you didn\u2019t make any improvements to the home, or increase your cost basis (the full cost you paid for the home). Your total profit is $150,000, which falls <em>below<\/em> the $250,000 exemption limit, meaning that you wouldn\u2019t pay capital gains tax.&nbsp;<\/li><\/ul>\n\n\n\n<p>(450,000 &#8211; 300,000 = 150,000)<\/p>\n\n\n\n<ul><li><strong>Example Two<\/strong>: Suppose you bought a house for $300,000 and sold it for $600,000 three years later in 2021. You made $100,000 worth of additions and improvements in your home, which increased your cost basis to $400,000. Your total profit is $200,000, which falls <em>below <\/em>the $250,000 exemption limit, meaning that you wouldn\u2019t pay capital gains tax.&nbsp;<\/li><\/ul>\n\n\n\n<p>(600,000 &#8211; 400,000 = 200,000)<\/p>\n\n\n\n<ul><li><strong>Example Three<\/strong>: Suppose you bought a house for $300,000 and sold it for $600,000 three years later in 2021. You did not increase your cost basis. Your total profit is $300,000, which falls <em>above <\/em>the $250,000 exemption limit, meaning that you\u2019d pay capital gains tax.&nbsp;<\/li><\/ul>\n\n\n\n<p>(600,000 &#8211; 300,000 = 300,000)<\/p>\n\n\n\n<p>This amount is $50,000 over the exemption limit.<\/p>\n\n\n\n<p>In 2020 your tax filing status was single and your income was $100,000. Your tax rate is 15%. <strong>You would owe $7,500 in capital gains tax<\/strong>.<\/p>\n\n\n\n<p>(50,000 x 0.15 = 7,500)<\/p>\n\n\n\n<p>Remember, the amount you pay the IRS depends on your tax filing status and tax bracket for the prior year.<\/p>\n\n\n\n<h2 id=\"avoid-paying-capital-gains-taxes\">Avoid Paying Capital Gains Taxes<\/h2>\n\n\n\n<p>There are a few different ways you can avoid paying a levy on sold assets.&nbsp;<\/p>\n\n\n\n<h3 id=\"increase-your-cost-basis\">Increase Your Cost Basis<\/h3>\n\n\n\n<p>The first thing you can do is to account for any fees and expenses tied to the home purchase. If you made home improvements and additions, you\u2019d want to tally those up and report them on your tax return. When you increase your cost basis, it helps reduce your capital gains.<\/p>\n\n\n\n<h3 id=\"offset-your-losses-from-investments\">Offset Your Losses from Investments<\/h3>\n\n\n\n<p>If you lost money on investments such as stocks and bonds during the year, you can offset those losses (up to $3,000) and even carry them forward to subsequent years when you report your capital gains to the IRS. This can help reduce the size of your tax bill.<\/p>\n\n\n\n<h3 id=\"consider-a-1031-exchange\">Consider a 1031 Exchange<\/h3>\n\n\n\n<p>According to IRS IRC Section 1031, a 1031 exchange helps you defer, not eliminate, your taxes. It involves rolling over proceeds from your home\u2019s sale into a similar investment within 180 days to qualify. The one thing to remember is that the like-kind exchange must be into a business or investment property, not your personal property. Keep in mind that if you acquired the property in a 1031 exchange during the past five years that you\u2019re disqualified from the capital gains tax exemption. We recommend that you seek guidance from an experienced tax professional and real estate attorney when attempting an exchange.<\/p>\n\n\n\n<h3 id=\"if-you-have-buyers-remorse\">If You Have Buyer\u2019s Remorse<\/h3>\n\n\n\n<p>Unfortunately, <a href=\"https:\/\/agentstory.com\/a\/how-to-handle-buyers-remorse\/\" target=\"_blank\" rel=\"noreferrer noopener\">buyer\u2019s remorse<\/a> could be a major reason that you want to sell your home. If you\u2019ve lived in the house for less than two years, we recommend holding off a little longer to avoid losing money on the sale and paying short-term capital gains taxes.<\/p>\n\n\n\n<h3 id=\"consult-with-a-tax-professional\">Consult With a Tax Professional<\/h3>\n\n\n\n<p>Seek out a tax preparer or accountant if you have questions about paying capital gains taxes. He or she can discuss strategies with you to avoid a hefty tax bill and advise you on the best course of action.&nbsp;<\/p>\n\n\n\n<h2 id=\"the-bottom-line\">The Bottom Line<\/h2>\n\n\n\n<p>Understanding the potential tax consequences of selling your home will help you decide when to sell and what your tax liability will be. Taxes are complicated and we recommend that you speak with a tax professional before you sell.<\/p>\n\n\n\n<p><strong>Disclaimer<\/strong>: <em>This post was not written or reviewed by a professional financial advisor or tax professional, and the suggestions should not solely be used to make financial decisions.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"You\u2019re this close to selling your home! Being under contract sure feels good, doesn\u2019t it? After all the&hellip;\n","protected":false},"author":15,"featured_media":998,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"_links":{"self":[{"href":"https:\/\/agentstory.com\/a\/wp-json\/wp\/v2\/posts\/997"}],"collection":[{"href":"https:\/\/agentstory.com\/a\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/agentstory.com\/a\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/agentstory.com\/a\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/agentstory.com\/a\/wp-json\/wp\/v2\/comments?post=997"}],"version-history":[{"count":3,"href":"https:\/\/agentstory.com\/a\/wp-json\/wp\/v2\/posts\/997\/revisions"}],"predecessor-version":[{"id":1269,"href":"https:\/\/agentstory.com\/a\/wp-json\/wp\/v2\/posts\/997\/revisions\/1269"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/agentstory.com\/a\/wp-json\/wp\/v2\/media\/998"}],"wp:attachment":[{"href":"https:\/\/agentstory.com\/a\/wp-json\/wp\/v2\/media?parent=997"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/agentstory.com\/a\/wp-json\/wp\/v2\/categories?post=997"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/agentstory.com\/a\/wp-json\/wp\/v2\/tags?post=997"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}