Capital gains arise from the sale of a capital asset like bullion, a house, a vehicle, heavy equipment, stocks, etc. The IRS classifies these gains into long-term capital gains and short-term capital gains.
Long-term capital gains on your residential house sale come with more favorable taxation. To be eligible for such tax benefits and deductions, you have to live at least 2 years in your house.
If you want to earn the benefits of long-term capital gains on your house sale without a tedious process, sell your home fast on Houzeo. Houzeo lists your home on the MLS in 24 hours and you won’t have to pay listing agents’ commissions.
What are Long-term Capital Gains and Taxes?
Long-term capital gains stem from selling a capital asset if you held it for more than 12 months. It applies to your house sale as well. As a home seller, you will get tax exemptions for up to $500,000 on your long-term capital gains.
Long-term Capital Gains vs. Short-term Capital Gains
| Long-term Capital Gains | Short-term Capital Gains |
|---|---|
| When you hold the assets for more than 1 year. | When you hold the assets for less than 1 year. |
| Lower tax rates: 0%, 15%, or 20%. | Higher tax rates: 10%, 12%, 22%, 24%, 32%, 35%, or 37%. |
| Tax exemption of maximum $500,000 on homes. | No tax exemptions on a home sale. |
How to Calculate Long-term Capital Gains On a House Sale?
Follow these steps to calculate capital gains on a house:
- Calculate the total cost of the property. This is the original purchase price plus any costs that you paid to make a permanent addition.
- Reduce the cost price by yearly depreciation. The net amount is your investment cost.
- Next, calculate the net sales amount. Exclude the selling expenses from the total sales proceeds.
- The difference between the basis and net sales is your capital gain. It can either be positive or negative.
- As per the IRS rules, classify it as short-term or long-term capital gains. The capital gains tax will apply as per your asset holding time and filing status.
Want to know Capital Gains Tax Rates?
Skip to: Long-Term Capital Gains Tax Rates in 2024
Long-term Capital Gains on Investment Properties
When you invest in properties, you may have claimed depreciation as tax benefits. The IRS recaptures these benefits through ‘Unrecaptured Section 1250 gains’ to prevent the double tax benefit on the same asset.
Investment properties like rental and flipping homes attract a higher tax rate of 25%. You can also offset capital gains on investment properties with capital losses on houses.
How to Save Long-term Capital Gains Tax on Real Estate Properties?
» Jump to: Section 121 Exclusion | Deductible Expenses | Capital Costs | Save the Receipts
1. Section 121 Exclusion
If you have used the house as a primary residence for at least 2 years before the sale, you can claim these deductions:
- $250,000, if you’re single, or
- $500,000, if you’re married and filing jointly.
What to save tax on investment properties? You can engage in 1031 exchanges. This lets you reinvest your sale proceeds into a new investment opportunity. This way you can postpone your tax liability.
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✍️ Remember: It’s not mandatory to live for 2 consecutive years. You can stay away for a very short period for work or travel. House flippers should beware of this as they could be subject to the short-term capital gains tax.
2. Deductible Expenses
You can deduct expenses from the sales that don’t add any asset to your home. You may incur these expenses in the course of selling your home such as:
| Appraisal fees | Escrow fees | Broker’s commission |
| Closing fees | Notary fees | Settlement fees |
| Transfer fees | Stamp taxes | Property taxes |
Other expenses on the house are not deductible even if you incur them to make your home saleable. For example, the cost of cleaning, repainting, or gardening services.
What if you have investment properties? You can deduct any repairs or renovation costs along with the average mortgage payments. Maintain all documents such as bills and bank statements to prove the expenses in an audit.
3. Capitalization of Improvement Costs
Costs of additions in a house are part of capital improvements. Such expenses may include a room addition, window installation, water heater, etc. Add these expenses to the initial cost of the house. You can claim depreciation on it.
You shouldn’t misclassify these costs on your tax returns. For example, you bought a house for $500,000. You added a staircase and an extra restroom for $50,000 to appeal to buyers. This will make the total cost $550,000.
4. Save the Expense Receipts
Keep a meticulous record of all the expenses on the house and maintain their receipts. Such record-keeping will help you claim deductions and reduce your tax liability.
How to Settle the Capital Losses on a House Sale?
When you sell a house for a price less than its original cost, you suffer a capital loss. In case of such cases, you can’t avail tax benefits and deductions on long-term capital gains.
The IRS describes different ways to settle your capital losses on homes. You can adjust this loss against your capital gains on other assets. However, if you have income from other sources, you can only deduct the lesser of $3,000 or the net loss from the income.
Say you have both capital losses and gains, adjust the losses against the gains. But, if the losses exceed your gains, adjust them against other income. If there is no other income, carry forward the losses to adjust them from the next year’s income.
What are Long-Term Capital Gains Tax Rates in 2024?
Long-term capital gains tax rates and relevant income brackets for 2024 as per Bankrate are:
| Tax Rates | Single Person | Married, Filing Jointly | Married, Filing Separately | Head of Household |
|---|---|---|---|---|
| Nil | $0 to $47,025 | $0 to $94,050 | $0 to $47,025 | $0 to $63,000 |
| 15% | $47,026 to $518,900 | $94,051 to $583,750 | $47,026 to $291,850 | $63,001 to $551,350 |
| 20% | $518,901 or more | $583,751 or more | $291,851 or more | $551,351 or more |
Bottom Line
You can take advantage of favorable tax treatments under the IRS rules by maintaining the records of your house sale and possession period. Failure to calculate long-term capital gains on real estate and taxes can lead to penalties.
If you’re looking to sell your primary residence where you’ve lived for more than 2 years, we advise you to sell it on Houzeo. With Houzeo you’ll sell FSBO and can possibly get the best price on your home sale.
FAQs
Can I deduct the closing costs of a house sale from capital gains?
Unfortunately, no. The only closing costs which are tax-deductible are property taxes and mortgage points. A person buys mortgage points to reduce interest rate. The mortgage payoffs of 3%-6% are not deductible as closing costs.
Do I have to pay state taxes on capital gains?
States too levy taxes on capital gains in addition to the federal income taxes. The rates may differ or be the same as those of the federal government.
Also, the states of Arizona, Wyoming, Nevada, and Texas levy different tax rates on capital gains. We recommend that you check the applicable effective rates, tax deductions, or credits in your local address.
How many years should I live in my house to claim long-term capital gains?
If you want to save taxes on long-term capital gains, you should own the property for at least 2 years in the previous 5 years. Those 2 years need not be consecutive and can include work related stays and vacations.
You can claim a heavy exemption under Section 121 from your taxable gains, if you fulfill this condition.
Can I claim a tax deduction if I have invested in rental houses?
Yes, you can claim mortgage interest payments, depreciation, and property taxes from every year's tax liability.
What is the capital gains tax rate for 2023 and 2024?
The long-term capital gains tax rate for 2023 and 2024 stands at 0%–20% depending on one's tax bracket. Meanwhile, the tax brackets for short-term capital gains are 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent, and 37 percent.
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