If you make money when you sell your real estate -- your home, a rental or an empty lot, for example -- you pay the IRS capital gains tax. Capital gains is the difference between your basis -- your purchase price, more or less -- and your sales price. The purchase price includes the entire cost of the property, not just your down payment.
You calculate capital gains on the "adjusted basis" of your property. If, say, you paid $220,000 for a rental house and sold it for $300,000, your gain may not be a straight $80,000. You get to adjust the $220,000 basis for expenses, such as home inspection and attorney fees from the purchase, and any improvements you made -- a new deck for example. If you have $7,000 in adjustments, your gain is only $73,000. You also adjust the sales price for expenses such as the real estate agent's commission.
If you own an investment or rental property for less than a year, profits from the sale count as short-term capital gains. You pay your ordinary income tax rate on short-term capital gains. If you own the property more than a year, you pay a maximum 25 percent tax rate, as of 2012. The federal government often adjusts capital-gains taxes or creates special exemptions, so the rules change quite frequently.
If you sell your personal home, you can shield $500,000 of the gain from tax if you file a joint return, $250,000 if you file as a single. You can claim the tax exclusion if you own the home at least two years and live in it for two out of the last five years. If you're away for part of that time on military duty or have to leave your home because of disability, the IRS has special rules to help you keep the exclusion.
You report capital gains or losses on Schedule D, then transfer the information to your 1040. Hang on to any documentation you need to prove your basis: purchase documents on the house, for instance, and the cost of any improvements you made. If you sell at a loss, you can write off up to $3,000 this year. If you lost more than that, you can carry over $3,000 per year in subsequent tax years until all your loss has been deducted.
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