What is capital gains tax?
Capital gains tax is a tax on profit. You may owe it when you sell an asset for more than its purchase price.
In real estate terms, that asset is often a home.
Here’s the simplest way to think about the term capital gains tax:
- You buy something
- You sell it later for more
- The profit may be taxed
You’re not taxed on the full sale price. You’re taxed only on the gain.
What is a capital gain?
A capital gain is the difference between:
- What you paid for a home
- What you sold it for
Example:
You buy a home for $300,000. You sell it years later for $420,000.
Your capital gain is $120,000.
That $120,000 is what capital gains tax rules look at.
What assets are subject to capital gains tax?
Capital gains tax can apply to many things, but for homeowners and real estate agents, the most common asset is real estate, including:
- Primary residences
- Rental or investment properties
Each type of property is treated differently under the tax rules.
How capital gains tax works when selling a home
Capital gains taxes are triggered when a gain is realized, meaning the home is sold.
How capital gains are calculated in real estate
For most homeowners, the basic calculation looks like this:
Sale price – purchase price = capital gain
In real life, it can be adjusted. Major renovations or improvements may increase your cost basis. But the core idea stays simple.
When capital gains taxes are owed
Capital gains taxes are usually reported in the year you sell the home. The gain is included on your tax return for that year.
Just owning a home that goes up in value does not trigger taxes. Selling is what matters.
Short-term vs. long-term capital gains (and why homeowners should care)
The length of time you own a home matters.
What are short-term capital gains?
Short-term capital gains apply when you sell an asset you’ve owned for one year or less.
These gains are usually taxed as ordinary income, which means they follow your normal income tax brackets.
Example:
You buy a home, live in it for 10 months, then sell it for a profit.
That gain may be treated as short-term and taxed at your regular income tax rate.
What are long-term capital gains?
Long-term capital gains apply when you sell an asset you’ve owned for more than one year.
Capital gains tax rates and tax brackets for home sales
Capital gains tax rates depend on:
- How long you owned the home
- Your income level
- Your filing status
How capital gains tax brackets work
Short-term gains follow standard income tax brackets. Long-term gains use separate capital gains tax rates, which are often lower.
This means two homeowners can sell similar homes and owe very different amounts in taxes.
Long-term capital gains tax rates explained
Many homeowners fall into lower long-term capital gains brackets. Some may even qualify for a tax-free rate on part of their gain.
Your income and filing status play a big role here.
Capital gains tax and real estate: what homeowners need to know
Do you pay capital gains tax when selling your home? Often, no.
Many homeowners never pay capital gains tax when selling their primary residence, thanks to an exclusion.
Capital gains tax exclusion for a primary residence
If the home you’re selling is your main home, you may be able to exclude a large amount of profit.
In general:
- Up to $250,000 for single filers
- Up to $500,000 for homeowners married filing jointly
To qualify, you typically must:
- Own the home for at least two years
- Live in it as your primary residence for at least two of the last five years
If you meet these rules, that portion of your gain may be completely tax free.
Example:
A married couple buys a home for $350,000. They sell it for $800,000 years later.
Their gain is $450,000.
Because they’re married filing jointly and meet the ownership and use rules, they may owe no capital gains tax at all.
Capital gains taxes on second homes and investment properties
Second homes and rental properties usually do not qualify for the primary residence exclusion.
That means the profit may be taxable.
Example:
You buy a vacation home for $400,000. You sell it later for $550,000.
That $150,000 gain may be subject to capital gains tax.
Special tax rules that can affect home sellers
Some homeowners may face extra taxes.
Net investment income tax and real estate
The net investment income tax may apply to higher-income households. It can add an extra tax on top of regular capital gains taxes.
How filing status affects capital gains tax
Your filing status matters. Homeowners who are single may face different thresholds than those married filing jointly.
This can affect:
- Capital gains tax rates
- Whether additional taxes apply
RELATED: How to Buy a House Before Selling Yours
Using losses to offset capital gains from a home sale
How capital losses work
If you sell another asset at a loss, you may be able to use those losses to offset capital gains from a home sale.
This doesn’t apply to losses on a primary residence, but it can matter for investors.
What is tax loss harvesting?
Tax loss harvesting is a strategy used to sell assets at a loss to reduce taxable gains elsewhere. It’s more common with investments, but it can still affect your overall tax picture in the year you sell real estate.
Capital gains and tax-advantaged accounts
Some gains are handled differently.
Do capital gains apply in retirement accounts?
Many tax advantaged accounts, like IRAs and 401(k)s, don’t tax capital gains as they happen. Taxes may apply later when money is withdrawn.
When capital gains may be tax free
Some gains can be tax free, especially when:
- Selling a qualifying primary residence
- Using Roth retirement accounts properly
Capital gains tax FAQs for homeowners
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Reinvesting doesn’t automatically remove the tax. Gains usually still need to be reported on your tax return.
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Yes. A large gain can increase your taxable income for the year.
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Unreported gains can lead to penalties and interest. Accurate reporting matters.
Final Thoughts
By understanding the basics of capital gains tax, buyers and sellers can better follow how it applies to real estate. Knowing how capital gains tax works when a home is sold can help clarify why some sales are taxed and others are not. These factors can also help real estate professionals explain how capital gains tax fits into the bigger picture of homeownership.
All information provided is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. CrossCountry Mortgage, LLC does not provide tax advice. Consult a tax advisor for further information.
