fbpx

Sonic Realty

Understanding Capital Gains Tax When Selling Your Home

Understanding Capital Gains Tax When Selling Your Home

Selling a home can be a significant financial milestone. While the profit from a sale can be rewarding, it is essential to understand the tax implications involved. One of the most critical aspects to consider is the capital gains tax (CGT), which applies to the profit from selling a property. This article explores capital gains tax, how it is calculated, available exemptions, and strategies to minimize your tax burden when selling your home.

What Is Capital Gains Tax?

Capital gains tax is a tax levied on the profit made from the sale of an asset, including real estate. The tax is calculated based on the difference between the selling and original purchase prices, also known as the cost basis. In the United States, the Internal Revenue Service (IRS) categorizes capital gains into two types:

  1. Short-term capital gains – Applied to properties held for one year or less before selling. These gains are taxed at the seller’s ordinary income tax rate.
  2. Long-term capital gains – Applied to properties held for over a year before selling. These are typically taxed at lower rates, ranging from 0% to 20%, depending on the seller’s taxable income and filing status.

How Is Capital Gains Tax Calculated?

The capital gain from selling a home is calculated using the following formula:

 

  • Selling Price: The amount you sell the home for.
  • Purchase Price: The original price you paid for the home.
  • Improvements: Costs incurred for significant home improvements that add value to the property, such as renovations or extensions.
  • Selling Costs are expenses related to selling, such as real estate agent commissions, legal fees, and staging costs.

Capital Gains Tax Exemptions and Exclusions

The Primary Residence Exclusion

One of the most beneficial exemptions available is the Section 121 Exclusion, which allows homeowners to exclude a portion of their capital gains when selling their primary residence. The exemption amounts are:

  • $250,000 for single filers
  • $500,000 for married couples filing jointly

To qualify for this exclusion, you must meet the following requirements:

  1. Ownership Test – You must have owned the home for at least two of the last five years before the sale.
  2. Use Test – You must have lived in the home as your primary residence for at least two of the previous five years.
  3. No Recent Exclusions – You cannot claim this exclusion if you have used it on another property sale within the last two years.

Exceptions to the Residency Rule

You may still qualify for a partial exemption in certain situations, even if you do not meet the two-year residency rule. These include:

  • Health-related moves (e.g., needing to relocate due to medical reasons)
  • Job relocations (e.g., moving more than 50 miles for work)
  • Unforeseen circumstances (e.g., divorce, natural disasters, or loss of employment)

When Do You Have to Pay Capital Gains Tax?

You must pay taxes on the remaining profit if your capital gains exceed the exemption limits. The tax rate depends on your income bracket:

Taxable Income (Single)Taxable Income (Married, Filing Jointly)Long-Term Capital Gains Tax Rate

Up to $44,625 Up to $89,250 0%

$44,626 – $492,300 $89,251 – $553,850 15%

Over $492,300 Over $553,850 20%

These thresholds are subject to change based on IRS updates, so checking the latest figures before selling your home is advisable.

How to Reduce Capital Gains Tax on Home Sales

1. Keep Track of Home Improvement Costs

Adding significant renovations, such as a new kitchen, roofing, or landscaping, increases the cost basis of your home and reduces taxable capital gains. Be sure to keep receipts and documentation for any improvements made.

2. Plan the Timing of Your Sale

Wait until you qualify for the primary residence exclusion by meeting the two-year rule. Additionally, selling during a year when your income is lower can help you fall into a lower tax bracket.

3. Use a 1031 Exchange

A 1031 exchange allows sellers to defer capital gains taxes if they reinvest the proceeds into a similar investment property. However, this applies only to investment or rental properties, not primary residences.

4. Offset Gains with Losses

If you have other investments that have lost value, selling them in the same year as your home can help offset your capital gains through a process known as tax-loss harvesting.

5. Consider Seller Financing

If you offer seller financing, you can receive payments in installments, spreading the tax liability over several years rather than taking the complete tax hit in one year.

Capital Gains Tax for Investment and Rental Properties

The primary residence exclusion does not apply to rental or investment properties. Instead, property investors must pay full capital gains tax on the profit from the sale. However, there are still ways to reduce the tax burden, such as:

  • Depreciation deductions – Depreciation expenses can lower your taxable income if you have rented the property.
  • 1031 exchanges – As mentioned earlier, this allows deferring capital gains taxes by reinvesting in a new property.
  • Holding the property longer – Selling after a year qualifies for lower long-term capital gains tax rates than higher short-term rates.

Capital Gains Tax Implications for Inherited Homes

If you inherit a property, capital gains tax is based on a stepped-up basis, meaning the home’s value is adjusted to its market value at the time of inheritance. If you sell the property immediately, you will have little to no capital gain, minimizing tax liability.

Conclusion

Understanding capital gains tax when selling your home is essential for effective financial planning. While the tax can be significant, taking advantage of exemptions like the primary residence exclusion, keeping track of home improvements, and strategically timing your sale can help minimize tax liability. If your situation involves rental properties, inheritance, or a 1031 exchange, consulting with a tax professional can provide tailored strategies to optimize your financial outcome. By staying informed and planning, you can maximize your home sale profits while reducing unnecessary tax burdens.

Learn More About Our Real Estate Services and How We Can Help You Buy or Sell Your Home

Let me know if you need links for specific sections or pages on the website!

Thank you for reading! If you enjoyed this article and want to explore more content on similar topics, check out our other blogs at Sonic Loans, Sonic Realty, and Sonic Title. We have a wealth of information designed to help you navigate the world of real estate and finance. Happy reading!

Articles

Zoning: What It Is and How It Affects Your Property Rights

Zoning is a fundamental aspect of urban planning and land use regulation that significantly impacts...

Will Realty Income Cut Dividend? Understanding the Factors at Play

Realty Income Corporation, often referred to as “The Monthly Dividend Company,” has a robust track...

Why Do Property Taxes Go Up?

Introduction Property taxes are an essential source of revenue for local governments, funding services like...

Who Owes a Fiduciary Duty in Real Estate and What Does That Mean for Your Transaction?

When navigating the complexities of a real estate transaction, it’s crucial to understand the concept...

What to Know About Filing a Property Tax Appeal

Introduction Property taxes can be a significant financial burden for homeowners. These taxes are based...

What is a Townhome?

When navigating the world of real estate, you’ll come across various types of residential properties...

What Is a Tiny House? 12 Surprising Facts

  The tiny house movement has gained significant popularity recently as more people seek simplicity...

What Is a Timeshare and Is It Worth Buying?

A timeshare is a unique form of vacation property ownership that allows multiple individuals to...

What Is a REALTOR® vs. Real Estate Agent?

When navigating the complex world of real estate, you’ll encounter terms like REALTOR® and real...

Scroll to Top
Affiliated Business Arrangement Disclosure Statement
This is to give you notice that Sonic Loans Inc., Sonic Title Agency LLC, and Sonic Realty LLC have a business relationship. The nature of the relationship between the Referring Party and the provider(s), including percentage of ownership interest, if applicable, is: Sonic Loans Inc., Sonic Title Agency LLC, and Sonic Realty LLC are all 100% owned by the same party. Because of this relationship, this referral may provide any of the above parties with financial or other benefit.
A. Set forth below is the estimated charge or range of charges for the settlement services listed. You are NOT required to use the listed provider(s) as a condition for settlement of your loan on, or purchase, sale, or refinance of, the subject property.
THERE ARE FREQUENTLY OTHER SETTLEMENT SERVICE PROVIDERS AVAILABLE WITH SIMILAR SERVICES. YOU ARE FREE TO SHOP AROUND TO DETERMINE THAT YOU ARE RECEIVING THE BEST SERVICES AND THE BEST RATE FOR THESE SERVICES.
Provider and Settlement ServiceCharge or Range of Charges
Sonic Realty LLC1%-6% of purchase price
Sonic Title Agency, LLC Title Insurance Policy: $950 - $1706 on a $250,000 property. (Rates vary and are dependent on the state, selling price, and loan amount on the property.)
Title Search Fee: $250 - $325 (where applicable)
Closing Fee: $450 - $650
Sonic Loans Inc.

This company provides various real estate mortgage loan origination activities either as a third-party originator or a mortgage broker, including loan pre-qualification, competitive bid process (when providing third-party origination services), loan origination, loan pre-approval, loan structuring, processing, and closing.

Loan Origination Charge: 0-3 % of loan amount (may include 3rd party fees)
Loan Discount Fee/points: 0.5%-6% of loan amount.
Application/Processing Fee: $0.00 - $875.00
Flood and tax service: $0.00 - $95.00
Underwriting Fee: $0.00 - $1295.00
Document Review Fee: $0.00 - $400.00
Appraisal Fee: $0.00 - $850.00
Credit Report Fee: $0.00 - $135.00

Actual charges may vary according to the particular lender selected, the particular services provided, and the underlying transaction, borrower selections, etc. Some or all of these fees may be charged by third parties and/or the Member Mortgage Lender/Mortgage Broker. The Member Lenders and Mortgage Brokers have agreed to pay a fee ranging from 0.5% to 2.75% of the loan amount to Sonic Loans in connection with a range of loan origination services provided by Sonic Loans to the Member Lender/Mortgage Broker. The fees are paid either directly to Sonic Loans by the Member Lender/Mortgage Broker or billed directly to you at closing.
B. Set forth below is the estimated charge or range of charges for the settlement services of an attorney, credit reportingagency, or real estate appraiser that we, as your lender, will require you to use, as a condition of your loan on this property, to represent our interests in the transaction.
Sonic Loans Inc. provides mortgage lender/broker services. Sonic Realty LLC provides real estate brokerage services. Sonic Title Agency LLC provides title insurance and settlement services.

Provider and Settlement ServiceCharge or Range of Charges
Appraisal Fee$0-$800
Credit Report Fee$63-$125
 Actual charges may vary depending on the lender and loan program selected which can be found on your loan estimate.
ACKNOWLEDGMENT
I/we have read this disclosure form and understand that Sonic Loans Inc., Sonic Realty, LLC, or Sonic Title Agency LLC are referring me/us to purchase the above-described settlement service(s) and may receive a financial or other benefit as the result of this referral.