What to Know About Capital Gains
There are many terms mentioned when buying or selling a house, but one you may not be familiar with is capital gains. So what exactly is a capital gain and how does it apply to homeownership? Well, if you ever plan to sell a home then it is a very important term to understand.
Put simply, capital gains refers to the difference in how much you pay for something versus how much you sell it for. The money you make from the sale is known as a gain (your profit). So for example, if you buy a home for $300,000 and then sell it for $350,000 — the $50,000 you make from the sale is understood as a capital gain or the difference between the prices of each sale.
Well, that sounds great... some extra money in the bank is awesome! But, we bet you're still wondering why capital gains are important when it comes to being a homeowner. Well just like almost anything else being purchased or sold, there's typically a tax on the amount. Capital gains are unfortunately a special kind of tax.
Rules of Taxation
The amount taxed on capital gains from the sale of a home will be different for each person and is determined by these main factors:
- The length of time you've had the investment in your home or owned it
- If you own and then sell your home in a year or less; this is considered a short-term capital gain and you are subject to a higher tax rate
- If you own your home for longer than a year and then sell; this is a long-term capital gain and you will receive a better taxable rate having held the asset (home) for a longer period of time
- If you experience a loss instead of a gain (selling your home for less than you originally purchased it for)
- Your income from the previous year
- Your filing status
The Good News
Despite all of the rules around capital gains tax, there is good news! There's a very high likelihood that your home will be exempt from taxation if you meet these conditions.
- You've owned the home for at least two years
- You have used the home as your primary residence for at least two years
- You haven't taken this exclusion from another home sale in within the last two years
If you meet these qualifications you can be exempt from up to $250,000 if you're single and $500,000 if filing as married.
While ultimately we pay taxes on almost everything, when it comes to capital gains in real estate it can be become a bit confusing. Although some aspects of capital gains are relatively straightforward, there are many scenarios that can alter the way you are taxed. That's why it's so important to work closely with a trusted and knowledgeable tax adviser who can guide you and answer any questions you may have along the way.
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