How Much is Capital Gains Tax on a Primary Residence?

Significant pieces of property, including residential properties, investment properties, cars, stocks, and bonds are all capital assets. When you sell a capital asset for more than you paid for it, you are subject to pay a capital gains tax.

Sellers are generally aware that they may have to pay this tax, but because of different exclusions and caveats to the capital gains tax, most people have lingering questions regarding this topic.

We met with Greg Antipoff, Founder & Owner of InSource CPA, to answer some of your most asked questions about capital gains tax on a primary home.

Who is exempt from capital gains tax on a primary residence?

Many sellers are listing their primary residence, a home they have lived in for an extended period of time.

“There is a principal residence exclusion,” explained Antipoff. “If you sell your primary residence, you can exclude up to $250,000 in gain if you are single, and up to $500,000 in gain if married.”

This means if you are single and buy a home for $400,000, you can sell it for up to $650,000 without having to pay capital gains tax. For a married couple, that same home could be sold for up to $900,000 before you are taxed on gains.

For the above to hold true, some basic requirements must be met:

  • Ownership. You must be the owner of the home for at least two of the past five years.
  • Use. You must have lived in the house as your primary residence for at least two of the past five years. The two years do not have to be consecutive.
  • No other excluded gains. You did not exclude gains from the sale of another property during the past two years.

I put in money for renovations. How is that factored in?

The ongoing cost for your home is called your basis. Starting with the purchase price of the home, you increase your basis with renovations, repairs, and maintenance. When you sell your house or property, take into account the final amount of money you put into the home.

For example, if you bought a house for $550,000 and put in $100,000 over the years, your basis is $650,000. You can then sell for up to $900,000 (single) or $1,150,000 (married) without paying capital gains tax.

I will make more profit than the principal residence exclusion. How much will I owe?

If making more profit than the principal residence exclusion, you will pay tax on gains over the $250,000/$500,000 exclusion. That means, if you are single and buy a house for $300,000, then sell it for $600,000, you will pay capital gains tax on $50,000.

Now the question is, at what rate will you be taxed on the gain?

“The rate of tax on that gain is dependent on your income. If you have low income; for example, you are retired, it is possible that you won’t pay anything,” Antipoff said.

Here is a breakdown on how much you will owe for long-term capital gains tax:

Single Filer

Income Capital Gains Tax Rate
$0 to $39,375 0%
$39,376 to $434,550 15%
$434,551 and over 20%

 

Married Filing Jointly

Income Capital Gains Tax Rate
$0 to $78,750 0%
$78,751 to $488,850 15%
$488,851 and over 20%

 

Married Filing Separately

Income Capital Gains Tax Rate
$0 to $39,375 0%
$39,376 to $244,425 15%
$244,426 and over 20%

 

Head of Household

Income Capital Gains Tax Rate
$0 to $52,750 0%
$52,751 to $461,700 15%
$461,701 and over 20%

 

I had to move before living in my house for two years. What will I owe?

For short term gains, or properties you’ve owned for less than one year, you pay on any type of gain. If you have owned the home for more than one year, but less than two, reach out to your CPA to discuss specifics.

Some circumstances allow you to claim a prorated exclusion on the sale of the home if selling before owning it for two years. This includes:

  • Employment. You must move due to a new job, if the place of work is at least 50 miles farther from your home than your former place of employment.
  • Health. You must move to obtain or provide medical care.
  • Other. If unforeseen circumstances occur, which may include death, unemployment, or a natural disaster.

I inherited a home and need to sell it. What will I owe?

When you inherit a home, you get what is called a step up in basis. “The basis becomes the value of the house on the date of death,” explained Antipoff. If your mom bought a house for $600,000, and the home is valued at $1,000,000 when she dies, you can sell for $1,000,000 without paying capital gains. If you decide to sell the house for $1,200,000, you would have to live in the home for two years to be able to get the exclusion.

For most sellers, it is clear whether or not you will owe capital gains tax on the sale of your home, based on how long you have owned it and how much profit you will make. If you have outlying circumstances or questions, we always advise you to meet with your CPA to go over specifics.

 

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