Capital gains on the sale of a primary residence refers to the profit that is made when a person sells their home for more than they paid for it. If a person has owned and lived in their home for at least two of the five years prior to the sale, they may be eligible for a capital gains exclusion. This means that they can exclude up to $250,000 of the capital gains from the sale of their home from their taxable income if they are single, or up to $500,000 if they are married and filing jointly.
There are some conditions that must be met in order to qualify for the capital gains exclusion. The home must be the taxpayer's primary residence, meaning that it is the place where they live most of the time. The taxpayer must also have owned the home for at least two years and lived in it for at least two of the five years prior to the sale. Additionally, you can not have used this exclusion in the last two years.
If a person does not meet these requirements, they may still be able to exclude a portion of the capital gains from the sale of their primary residence if they had to sell the home due to a job change, health issues, or other unforeseen circumstances.
It's important to note that the capital gains exclusion only applies to the sale of a primary residence, and not to the sale of a vacation home or rental property. If a person sells a vacation home or rental property, they will have to pay capital gains tax on the profit made from the sale.
To calculate the taxable capital gain on the sale of your primary residence, you will need to first determine the selling price of the home and the cost basis. The selling price is the amount that the home was sold for, while the cost basis is the amount that was paid for the home, including any improvements that were made. To determine the cost basis, you will need to add up the following:
The purchase price of the home
Any closing costs or fees associated with the purchase, such as loan origination fees or title insurance
Any improvements that were made to the home, such as a new roof or an addition
The cost of selling the home, such as real estate commissions and legal fees
Once you have determined the selling price and the cost basis, you can calculate the capital gain by subtracting the cost basis from the selling price.
For example, let's say that you purchased a home for $200,000 and made $50,000 in improvements to the home over the years. You also paid $10,000 in closing costs and $15,000 in real estate commissions and legal fees when you sold the home for $400,000. In this case, the cost basis would be $265,000 ($200,000 + $50,000 + $10,000 + $15,000), and the capital gain would be $135,000 ($400,000 - $265,000). If you are eligible for the capital gains exclusion, you can exclude up to $250,000 of the capital gain from your taxable income if you are single, or up to $500,000 if you are married and filing jointly. Any capital gain that exceeds the exclusion amount will be subject to capital gains tax.
If you've owned the property for less than 2 years, you would not get the exclusion and would be taxed according to general capital gains tax rates. If you owned the home for more than 1 year, you'd be taxed at the long-term rates. Most people would pay 15% - 20%, though some qualify for 0%. If you owned for less than 1 year, your rate would be your ordinary tax bracket rate.
Please keep in mind, I'm not an accountant or attorney. This post is informational only and does not constitute advice. You can read the IRS publication on the subject here, but I strongly advise you to see professional guidance from a tax professional.