5 Things to Know About Capital Gains and Your Home Sale

Capital gains are a specific type of tax that was created for any asset that has appreciated. Learn more about when capital gains apply to a home sale, what the rates are, and how to potentially avoid or defer paying the taxes.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.

Capital Gains Are Progressive

Capital gains are viewed as income to the homeowner.  Here are the standard numbers to know:

• If the seller makes under $39,375 per year, capital gains do not apply.
• If the seller makes between $39,375 and $434,550, the tax rate is 15%.
• If the seller makes more than $434,550, the tax rate is 20%.

However, these numbers change regularly to account for general salary inflation, so it's important for a homeowner to determine their bracket.

Deduction Rules

If a seller has owned their property for at least five years and lived in it for at least two years, they are allowed to deduct up to $250,000 from the profits of their home sale. This rule is per owner, meaning a married couple who both own the home could deduct up to $500,000.

For those renting out their home, the time limits do not have to be consecutive. For example, it would be possible for the homeowners to live in the home for the first year, rent it out for three years, and then live in it for the final year before selling the property.

Seller Deductions

If capital gains do apply to the home sale, it is possible to deduct certain expenses. This can be any costs related to either the sale itself or any major upkeep involved in the home. However, these expenses aren't always clear, so it's recommended for homeowners to have a real estate expert review what is and isn't eligible.

Standard itemized deductions include closing costs, staging fees, and home renovations. It may even be possible to deduct sale costs related to the original purchase of the property. The deductions effectively lower the sale price of the home, bringing it closer in line to the original purchase price.

Depreciation vs. Capital Gains

Depreciation and capital gains are opposite forces for the homeowner if they choose to rent the property. The more depreciation a homeowner claims, the lower the value of the property.

Can Sellers Avoid Capital Gains?

There's one way for homeowners to avoid paying capital gains entirely, but it's only by canceling them out through capital losses. For example, if a homeowner has two properties, one that is increasing in value and one decreasing in value, it may make sense for them to sell both properties at the same time and deduct the capital losses from the capital gains. 

Additionally, in the case of a second property gaining value and a primary home losing value, the homeowner can consider selling the primary home and moving into the second house for at least two years, so the deductions apply to the new primary residence.

Finally, a homeowner can consider a 1031 exchange, where they buy a property similar in value to the property they just sold. In this case, this process is considered a deferment, as the homeowner will eventually need to pay if their new home appreciates. This exchange is a complicated process that should be completed by a professional.

Capital gains will be different for every property sale. In the case of a primary home, the gains are unlikely to be a major consideration for many homeowners. In other sales, it can potentially cost about 20% of the home sale profits. Even when capital gains do apply, there are several options available to sellers that can make it easier for them to make a smarter financial decision.

For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.