Real Estate Capital Gains Taxes When Selling a Home Including Rates For 2024

Home Selling and Real Estate Capital Gains Taxes

Do you know how real estate capital gains taxes work when selling a house? Selling your home can net you a significant return. But what does the tax man have to say about it?

With property values across the country skyrocketing, now more than ever, it is vital to understand capital gains taxes on the sale of a home.

Taxes on capital gains can get you big-time in certain situations, so it is crucial to understand how capital gains apply to your home sale before trying to rake in the money.

The rules regarding the capital gains tax on real estate have changed over the years, so it is crucial to know how they work now.

Luckily, selling your home and realizing a profit is more accessible due to the capital gains tax exclusion. Making money tax-free is good news for anyone wanting to sell a home.

Understanding how capital gains work when selling a home is crucial to reducing your tax bill. You need to know the laws, whether the home is your primary residence or a rental property.

By the time you’re done reading, you’ll have a much better handle on understanding the real estate capital gains tax.

Let’s take a deep dive into everything you need to know.

What Are Capital Gains Taxes?

A capital gains tax is a tax on the money you have made from an investment. When a capital asset such as a house or other real estate is sold, your gains become realized. At the point of sale, it becomes taxable income.

The profits on the sale of your home never become taxable until a sale occurs. The capital gains tax applies to profits on assets held for over a year. These are referred to as long-term capital gains. The long-term capital gains tax rates are 0%, 15%, or 20%, depending on the tax bracket you fall into. As you can see, there is a vast difference from low to high for long-term capital gains rate.

A short-term capital gain pertains to assets held for less than a year. They are taxed as ordinary income. You will pay ordinary income tax rates depending on your tax bracket. For the vast majority, long-term gains are less costly than short-term gains.

Taxable capital gains for the year are reduced by the total capital losses incurred in that year. Capital losses are when you sell an asset for less than the sales price. Your long-term capital gains, less capital losses, are the net capital gain. This is the amount on which capital gains taxes will be assessed.

That being said, real estate transactions are treated differently. You are allowed a substantial deduction whether you are single or married. We will discuss this at length.

How Does The Capital Gains Tax Rate Work?

The following are the long and short-term capital gains tax rates for 2924.

Long-term capital gains tax rates for 2024

See the Filing Status For Real Estate Capital Gains Tax

• Single: 0% up to $47,025
• Single: 15% between $47,026 – $518,900
• Single: 20% Over $518,900
• Married filing jointly: 0% up to $89,250
• Married filing jointly: 15% between $89,251 – $553,850
• Married filing jointly: 20% over $553,850
• Married filing separately: 0% up to $44,625
• Married filing separately: 15% between $44,626 – $276,900
• Married filing separately: 20% over over $276,900
• Head of household: 0% up to $63,000
• Head of household: 15% between $63,001 – $551,350
• Head of household: 20% over $551,350

According to the Internal Revenue Service chart, in 2024, single people won’t have any capital gains taxes if their taxable income comes in at $47,025 or less.

The rate increases to 15 percent on capital gains for single filers if their income falls between $47,026 and $518,900. When your income increases above that level, the tax rate increases to 20 percent.

Your tax filing status can make a difference regarding capital gains tax liability. The income tax you pay can vary substantially. As you can see from the IRS publication, there are tax benefits for being married and filing jointly for capital gains.

Single taxpayers often pay quite a bit more in taxes.

Short-Term Capital Gains Tax Rates For Tax Year 2024

When paying short-term capital gains taxes, the tax bracket for ordinary income will apply. For 2024, the tax brackets are:

• Ten percent for single filers up to $11,600, up to 23,200 for married filing jointly, and up to $16,550 for the head of household.
• Twelve percent for single filers between $11,600 – $47,150, $23,200 – $94,300 for married filing jointly, $16,550 – $63,100 for head of household.
• Twenty-two percent for single filers between $47,150 –$100,525, $94,300 – for married filing jointly, and $63,100 – $100,500 for head of household.
• Twenty-four percent for single filers between $100,525 – $201,050 – $383,900 – for married filing jointly, and $100,500 – $191,950 for head of household.
• Thirty-two percent for single filers between $191,950 – $243,725, $383,900 – $487,450 for married filing jointly, and $191,950 – $243,700 for head of household.
• Thirty-five percent for single filers between $243,725 – $609,350, $487,450 – $731,200 for married filing jointly, and $243,700 – $609,350 for head of household.
• Thirty-seven percent for single filers above $609,350, above $731,200 for married filing jointly, and above $609,350 for the head of household.

It is important to note that the income amounts of each tax bracket will differ depending on your filing status. For example, single filers will have a different tax liability and, therefore, other income tax than a married couple.

A married couple could file a joint return or file separately. A tax return and the amount of taxes you pay will differ based on how you file.

Nerd Wallet has an excellent resource that breaks down all income levels for each tax filing status. Look to see where you fall to calculate the capital gains you’ll pay.

You Pay More Taxes When Selling Fast

As you can see, property owners get whacked hard if they have to sell quickly. Sometimes, unforeseen circumstances, such as job changes, that force a quick sale of your main home. Otherwise, sticking it out to meet the residency requirement for a long-term capital gains exclusion makes sense.

Real Estate investors who fix and flip properties are up against the short-term capital gains tax all the time. Creative ways to reduce their taxable gain are often needed.

Short-term capital gains are treated just like regular income. That being said, let’s take a deeper look into the real estate capital gains tax exclusion.

Real Estate Capital Gains Rules Changed After 1997

If you sold a home pre-1997, you might be surprised to hear about the generous tax break you can get on your home sale. This is because the current real estate capital gains tax laws were enacted on May 7, 1997.

This tax code is called The Tax Payer Relief Act of 1997. Before this time, you had to take the profit from your home sale and use it to buy another, more expensive house within two years. If you didn’t do this, taxation on your earnings was inevitable.

The only other option you had to protect your earnings was based on age. If you were 55 or over, you could take an individual exemption one time in your life of up to $125,000. Either way, you had to fill out a particular form to prove to the IRS that you followed the rules.

The current laws went into effect with the Taxpayer Relief Act of 1997. This act made it much easier to sell your residence and enjoy the profit from the sale.

You can still use the money to buy a new home. But you can also purchase a boat, car, or vacation. It’s up to you.

When you sell a home, it is essential to understand how lax tax laws work. When you purchase the property, you should know the home-buying tax deductions. Understanding tax laws can save you thousands of dollars annually if you know what to look for.

Real Estate Capital Gains Tax Explained

Fortunately, real estate capital gains are among the best tax breaks available to the average person. This means you have little to worry about in most situations unless your home will bring in a significant amount of money.

You must realize substantial gains on your home before paying a penny in taxes. In most instances, the rules are as follows:

• If you are single, you can make up to $250,000 in profits from your home sale before paying taxes.
• If married, you can make up to $500,000 in profits before paying capital gains tax.

Here is an example of the real estate capital gains law: You were fortunate to purchase your home for $500,000, now worth $800,000. Your $300,000 in profit or gain will not be taxed if you are married, as the $500,000 in profit is excluded from taxation.

So what happens if you make more than $500,000 in profit? Under the current tax laws, you would be taxed at a 20% capital gains tax rate on the amount over the $500,000 threshold.

This is pretty exciting news for most home sellers. Granted, some areas have seen severe real estate booms, where you may be able to go over these numbers when you sell. But most home sellers worry little about paying Uncle Sam for their home sale.

However, you do have to meet all of the requirements. Let’s explore those conditions so you can see how they apply to you:

Requirements For Taking Real Estate Capital Gains Tax Deduction

The following conditions must apply to qualify for the real estate capital gains tax exclusion.

Must Be Your Principle Residence

To qualify for the capital gains tax exclusion, you must pass the ownership test. There are special rules that apply to take advantage of this tax break.

The tax break is designed for people selling their home or primary residence, not investment property. Rental properties do not apply for tax benefits. You must live in this residence for two out of five years. Practically speaking, two years is not a long time to make a home your home. And the best part of this requirement is that it applies repeatedly.

You can live in a home for two years and sell it without penalty. You can buy another house, live there for two years, and sell it again. There are no limits on how many times you can do this as long as you meet the two-year requirement.

You Need to Live in The Home For Two Out of Five Years

As far as living in the home for two out of the last five years, there are no hard and fast rules. You could have lived in the house the 1st year, rented it the next three, and lived in it again in the last year, and you would be okay as far as the capital gains exclusion goes. No rules exist for needing to live in the house for consecutive years.

Years ago, when the real estate market was a lot different, I had a friend who lived in Southborough, Massachusetts, who would habitually reside in a home for a couple of years and then sell.

He would do this every few years when the real estate market increased. He would avoid paying real estate capital gains taxes by following the tax code to a tee.

Tax Benefits Don’t Apply to Your Vacation or 2nd Home.

Remember that selling your vacation or second home does not yield the same tax benefits.

Even if you move into the second home and live there for two years, some of the profit from the sale will still be taxable, based on how long the residence was used as a secondary home.

This tax rule would apply even if you sell to a family member. You will also need to take into account the rental income you generated.

Getting Married Can Bring Down Your Capital Gains Tax Bill

The doubled tax exclusion amount – $500,000 for married couples – is exceptionally appealing for some couples who have yet to marry. The tax laws are pretty forgiving here.

If you get married only a short time before the sale, you can still qualify for the higher break if you have lived in the home for two years.

So if you lived together for a year and a half, then married and sold six months later, you should qualify for the $500,000 tax break.

Understand Your New Spouse’s Home Sale History

Although the law is pretty lenient on marriage residency times, it is not so lenient on previous exclusion uses. Previous marriages are a vital consideration regarding real estate capital gains taxes.

If your new spouse used the home sale exclusion within the past two years – like selling their house to move in with you – this would impact your ability to utilize it for the current home sale.

If they just sold the house, you will need to wait two years before taking advantage of the complete exclusion. You may be able to get a partial exclusion, though, depending on your situation.

It would be advisable to consult with a qualified tax attorney on something such as this.

Wealthy Real Estate Tax Loophole Closed

In 2009, a law was put into effect that closed a tax loophole in the capital gains tax law. The code is known as the 2008 Housing and Economic Recovery Act. The law was put into effect to prevent wealthy homeowners from avoiding paying taxes.

Before the loophole was closed, wealthy owners who owned two or more homes could jump from one house to another to avoid paying capital gains.

These wealthy homeowners would avoid paying the capital gains tax by selling their primary home, claiming a complete tax exclusion, and then moving to a second or third home they have owned for some time. They would then make it their primary residence and then turn around and sell the house, paying little or no capital gains tax.

The law’s modification says that the gain may not be excluded for “non-qualified use,” mostly when the home was not used as the taxpayer’s primary residence.

Special Provisions for Extenuating Circumstances

The Military Tax Exclusion

The military tax exclusion – Being in the military has its benefits for capital gains taxes and selling a home. Because of being deployed, those in the military often find it hard to meet the residency rules and pay taxes when they sell.

A law put in place in 2003  exempts military personnel from the two-year use requirement mentioned above for up to 10 years, letting a serviceman or woman qualify for the complete exclusion whenever they must move to fulfill their service commitments.

You can extend the qualifying period if you or your spouse is on qualified official extended duty.

There are also additional tax benefits for being a veteran that should be understood. Here is an outstanding reference on property tax exemptions by the state for veterans. If you qualify for one of the exemptions, less money is coming out of your pocket!

Your Spouse Passes Away

The death of your spouse – Another provision in the real estate capital gains tax law was changed in 2008. This change considers the unique circumstances an owner faces when a home sells after their spouse dies.

Previously, to exclude the entire profit amount from taxes, the surviving spouse had to sell within the same year of the death.

The change allowed the widower to have up to two years to sell the property without facing the burden of paying taxes.

As long as the surviving spouse sells within the two-year window, they can exclude the total amount of profit.

Understanding How Much Capital Gains Tax

Your exclusions are another vital point to understand about real estate capital gains taxes. Determining how much you can exclude is not just a matter of your original purchase price.

It would be best to determine precisely how much profit you made minus what you put into the home. Your investment into the house will be considered what you can deduct from your profit.

Profit is taxed, and gain is considered how much you made after your basis in the home is considered. The equation is not that complicated, but it does involve more than just the final selling price of your home.

To determine your cost basis in the house, you need to look at what you paid for the home, plus any capital improvements you made to the residence. Capital improvements can be the en suite bathroom renovation, the garage you converted into a recreation room, etc. These items will contribute to your adjusted basis, bringing your capital gain tax down. You can think of them like you would a deduction.

By keeping detailed records, you can reduce your tax burden.

Know The Difference Between Repairs vs. Home Improvements

One thing to note is the importance of distinguishing between an improvement and a repair for tax purposes. Home improvements can count toward your tax basis; repairs are not. Understanding the difference between the two is paramount.

According to the Internal Revenue Service, an improvement increases the value of your home, while a non-eligible repair returns something to its original condition. The IRS says that a capital improvement must last more than one year, add value to your home, or prolong its life.

The perfect example to distinguish between the two would be fixing a window pain vs. installing replacement windows.

This is why keeping receipts for any improvements you make to your house is always a good idea. It all matters when you are calculating your basis. Once you know what you have invested, you can subtract that number from the home’s sale price to get your actual profit.

Remember that even if you do not meet the exact standards for the exclusion – say you lived there only a year and a half – you can still use a portion of it to protect your profits.

The exact amount will be based on how closely you fit the standards. You would be at 75% of the requirement in a year and a half, meaning you could get a 75% exclusion.

Speak to Professionals Before Selling Your Home

If you are considering selling your house, talk to your Realtor and accountant to determine how the real estate capital gain laws apply. If you are like most people, you can sell your home without worrying about taxes. The IRS also offers an excellent real estate tax guide to help answer tax questions.

The information contained in this article is believed to be accurate. However, every person’s tax situation may differ; therefore, you should consult a qualified tax accountant or attorney before acting on the information contained herein.

The Real Estate Capital Gains Tax Rules Differ For Investment Property

How real estate capital gains taxes are dealt with on investment property differs. You will pay a twenty-five percent real estate capital gains tax rate for investments depreciated over time. The IRS would like to recapture some of the tax benefits you’ve been afforded via depreciation deductions over the years of ownership.

These investment assets are known as Section 1250 property. The collection is referred to as the depreciation recapture tax.

The IRS rule on investment property prevents you from getting a double tax break on the same property.

How Do Real Estate Capital Gains on Home Sales Get Reported?

You might wonder how the IRS even knows what you will owe when selling a home. When you are at a home closing with your real estate agent, the bank attorney or closing agent will ask you to sign a tax document called the form 1099-s.

This IRS form is your declaration of whether your home sale is a taxable event to the IRS.

The document ensures that you accurately track your profits so the Internal Revenue Service knows whether you’re on the hook for a real estate capital gains tax. It’s hard to avoid paying capital gains on real estate unless you’re willing to lie. Doing so would not be wise.

Final Thoughts

Understanding the capital gains tax on real estate is paramount. Otherwise, selling a house could cost you a lot of money. Your real estate capital gains tax can vary based on several factors.

Nobody should pay more income taxes than they have to. If you have any questions on the tax laws as they apply to real estate, take the time to speak with a qualified accountant or tax specialist. You’ll be glad you did.

Hopefully, you now better understand how real estate capital gains taxes work.

Other Helpful Real Estate Tax-Related Articles

• How to get a reduction on high property taxes – see how to reduce your property tax bill if you are being assessed too high.
• How do capital gains tax laws work  – get more sound guidance on how capital gains tax laws work via Bankrate.

Use these additional resources to understand how real estate capital gains and other tax laws work.

About the Author: Bill Gassett, a nationally recognized leader in his field, provided information on real estate capital gains taxes when selling a home. He is an expert in mortgages, financing, moving, home improvement, and general real estate.

Learn more about Bill Gassett and the publications he has been featured in. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.

Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!

I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.

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Capital Gains Tax on Real Estate and Home Sales

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How do real estate capital gains taxes work when selling a home? See what you need to know about real estate capital gains taxes.

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Bill Gassett

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Maximum Real Estate Exposure

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