Do you own a home that you’d like to sell? If so, capital gains on home sale may be something that crosses your mind. But what many people do not know is that capital gains tax laws are different for homeowners than they are for other types of capital gains. Here we will tell you about the differences and how they affect your capital gains taxes.
For capital gains tax purposes, a home is considered to be your primary residence. This means that for capital gains you are allowed to exclude up to $250,000 in capital gains if filing as an individual or up to $500,000 of capital gains if filing jointly with your spouse on the sale of your home. It doesn’t matter if you are single or married; $250,000 is the capital gains exclusion amount.
Now that we know what capital gains tax on home sale really means let’s talk about when capital gains tax applies to your primary residence and when it does not? Capital gain taxes do not apply in the following circumstances:
- capital gains on rental property
- capital gains from the sale of a home outside your primary residence, such as vacation homes or those that are rented out regularly.
In each circumstance above capital gain tax will only be applied to profits made after subtracting any expenses associated with selling these properties. For example, if you sell a house for $250,000 that you purchased for $200,000 then capital gains tax is only applied to the remaining $50,000 after subtracting any expenses.
Capital gain taxes are levied on profits made from selling capital assets. This means if your home sale results in a capital loss there will be no capital gain tax taken out of this amount when filing capital gains taxes. Instead, capital losses can be used to offset capital assets that incur capital gain in a given tax year or any future years when capital gains are made on these other types of properties.
Finally, it is important to understand the difference between short-term and long-term capital gains on home sale before filing your capital gains taxes. A capital gain from the sale of a home is considered to be short-term if capital gains tax was paid on it within a year of selling your primary residence. In this case, capital losses cannot offset any capital assets until three years have passed after you sell your house and pay capital gains taxes. If you own more than one property long-term capital gains tax will apply to capital assets that are not your primary residence.