Things to Know About Capital Gains on Real Estate

You may be able to exclude all of the capital gains when you sell your home.

You may be able to exclude all of the capital gains when you sell your home.

Internal Revenue Service rules on excluding capital gains on sales of residential property have gotten generous and you may be able to exclude up to $500,000 of gains from taxable income if you meet certain eligibility tests. Remember to add any improvements you made to the house and property to the basis, or cost, before calculating the net gain. If you've put on a roof or added insulation, you may find your capital gain is a lot less than you think.

Does a Private Home Purchase Exempt Capital Gains Tax for the Seller?

If you've just sold a home and want to avoid capital gains tax on the proceeds, you no longer have to purchase another home to do so. To qualify for the exclusion, you or your spouse must have owned the home for at least two years and both of you must have lived in it during at least 24 of the last 60 months. Even if you rented the home out for part of the past five years, you can still qualify for the full exclusion. You also must not have used an exclusion in the previous two years. If you qualify, you can exclude up to $250,000 of capital gains, or up to $500,000 for a married couple filing jointly.

How Long Do You Have to Invest in Another Property Before Paying Capital Gains Tax?

You do not have to purchase a different property to take the capital gains exclusion on the sale of your home, even if you were not living in it at the time of sale. As long owned the home for at least two of the last five years you lived there and lived in the home for 24 of the last 60 months you can exclude up to $250,000 for single or head of household taxpayers and up to $500,000 for married filing jointly.

What Is the Percentage of the Capital Gain Tax Paid on Land Sold Separate From a Primary Residence?

The IRS is somewhat less generous with exclusions on sales of land,. If you sell the land on which your home is built without selling the structure itself, you can't exclude any capital gains from taxes, but if you sell a vacant lot adjacent to the home, you may be able to exclude gains on the sale of the land if you also sell the home, even if it's to separate purchasers. The IRS treats the sale as one transaction, with the total maximum exclusion of $250,000 for non-married taxpayers and $500,000 for married filing jointly. If you don't qualify for an exclusion, the long-term capital gains rate is 15 percent if you held the property for more than one year. You'll pay short-term capital gains rate on property held less than one year, which is the same rate you pay on other income as determined by your tax bracket.

Can a Net Operating Loss Offset a Capital Gain?

Net operating losses occur when your deductions exceed your income for the year and are generally because of deductions for business losses, casualty and theft losses, moving expenses, rental property deductions or unreimbursed employee expenses. The loss is usually carried forward against future income, and can be used to offset a capital gain in a future year. There are no rules about what type of income can be offset in future years.

How Long Do You Have Before You Pay Capital Gains Tax?

If you sell your main home and qualify for the exclusion, you may not have to pay any capital gains tax at all. The IRS doesn't even require you to report the sale of your main home on your taxes if your exclusion covers the full amount of capital gains. If your gains are more than the maximum allowable exclusion for your tax filing status, then you'll report the sale of the property on the tax return for that year. If you sell your house at any time during 2012 and you owe capital gains tax, you'll pay the tax in April 2013 when you file the return.


About the Author

Naomi Smith has been writing full-time since 2009, following a career in finance. Her fiction has been published by Loose Id and Dreamspinner Press, among others. She holds a Master of Science in financial economics from the London School of Economics and a Bachelor of Arts in political economy from the University of California, Berkeley.

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