You spent a lot of time researching mortgages and buying a home only to get a letter from your mortgage company informing you that your mortgage has been sold. You’re understandably confused. How did this happen, and what’s the point? Why go to all the trouble of choosing a mortgage company if it is just […]
What is capital gains tax and how does it affect me?
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
Long 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:
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.