Published by Forbes.com | April 3, 2024
Due to capital gains tax, profits from a home sale may not entirely end up in your pocket.
In a real estate market with skyrocketing prices, selling a property can yield significant financial gains. According to a recent Bankrate report, the supply of U.S. homes has been constrained in recent years. While it has created a grueling market for buyers, owners and potential sellers are benefiting from appreciation. In fact, according to Construction Coverage, U.S. home values grew by more than 100% over the past decade, with some cities and towns seeing a jump of more than 200%.
With that said, due to capital gains tax, profits from a sale may not entirely end up in your pocket. Capital gains tax is a levy on the profit made from the sale of noninventory assets, including real estate. Understanding how this tax applies, especially to the sale of a primary residence, is crucial for homeowners looking to sell.
What Is Capital Gains Tax?
Capital gains tax is a tax on the profit realized on the sale of a noninventory asset that was purchased at a lower price. The most common capital gains are realized from the sale of stocks, bonds, precious metals, and property. For real estate, this tax can apply to second homes, investment properties, and under certain conditions, your primary residence.
Understanding Primary Residence Rules
The Internal Revenue Service provides some relief from capital gains tax if the property sold was your primary residence. To qualify, you must have owned the home and used it as your main residence for at least two of the five years immediately preceding the sale.
Exclusion Limits
- Single Filers: If you’re single, you can exclude up to $250,000 of the capital gains from the sale of your primary residence from your income.
- Married Couples Filing Jointly: For people in this scenario, the exclusion doubles to $500,000.
It’s important to note that these exclusions only apply if the property sold was your primary residence for the required period.
