When you sell or inherit a home, it’s important to know that not all of the home value will end up in your pocket. You may have to pay what is known as a capital gains tax. This occurs when the home’s sale price is more than the home’s fair market value. However, you may qualify to exclude it from your income if your income is below a certain threshold or the sale of the property doesn’t exceed $250,000, or $500,000 for married couples.

There are two types of capital gains—short and long term. These terms are calculated from the day after the original purchase to the date of sale.

Long term capital gain

selling a homeLong term capital gain results from the sale of an asset that has been owned for a long period of time, typically more than one year. There are only three capital gains tax brackets:

  • 0%
  • 15%
  • 20%

Income on these brackets for single filers is, respectively:

  • $0 to $40,000
  • $40,001 to $441,450
  • $441,451 or more

Long term investments almost always pay less in taxes than if the same property were sold in less than a year.

Short term capital gain

A short-term capital gain results from the sale of an asset owned for one year or less. There are no special tax considerations for short term capital gains, so they are taxed like your ordinary home income, depending on your tax bracket.

You will need to report the sale

No matter if you are selling an investment property, your primary residence, or secondary residence you will have to report the sale to the IRS, even if the gain is excludable. You will receive what is known as Form 1099-S, Proceeds from Real Estate Transactions that reports “the sale or exchange of real estate.”

Capital gains tax applies even if the home was inherited.

Keep in mind the information above when considering using the profits from your home sale as a down payment on your next home. While your lender can advise you on how much you will need to put down, always consult an accountant or tax advisor for more information about capital gains taxes and full eligibility requirements on a tax deduction.

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The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.