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Selling Assets & Tips to Calculate Tax Basis

Selling Assets & Tips to Calculate Tax Basis

Are you selling an asset? Avoiding Real Estate Capital Gains Tax in 2022

It's great to get a good price for your home, but in some cases, the IRS may want some of the action. Indeed, real estate capital gains may be taxed. Learn how to minimize or avoid a tax bite when selling your assets.

What is capital gains tax?

  • Capital gains taxes can apply to investments, such as stocks or bonds, and tangible assets, such as cars, boats, and real estate.

  • The IRS and many states levy capital gains tax on the difference between what you pay for an asset (base price) and what you sell (its selling price).

How does real estate capital gains tax work?

The IRS generally allows you to exclude up to:

  • Real estate gains of $250,000 if you are single.

  • $500,000 in real estate income in the event of married filing jointly.

For example, if you bought a house for $200,000 10 years ago and sold it for $800,000 today, you would earn $600,000. If you are married filing jointly, $500,000 of that income may not be subject to income tax—capital (but $100,000 profit could be).

When are capital gains paid when selling a home?

Your $250,000 or $500,000 exclusion usually disappears, meaning you pay tax on all income if any of these things are true:

  • The house was not your principal residence.

  • You are subject to expatriation tax.

  • You have already claimed exclusion of $250,000 or $500,000 on another home within two years of selling this home.

  • You have not lived in the house for at least two years in the five years preceding its sale. (Persons with disabilities and those in the military, foreign service, or intelligence community can get a break in this part)

  • You have owned the property for less than two years in the five years period before reselling it.

  • You purchased the home on a peer-to-peer basis (essentially by exchanging one real estate investment for another, also known as a 1031 exchange) within the past five years.

If you find that some or all of the money you make from the sale of your home is taxable, you need to know what capital gains tax rate applies.

  • Short-term capital gains tax rates generally apply if you have been in business for less than one year. The rate is equal to the normal income tax rate, also called the tax category.

  • Long-term capital gains tax rates generally apply if you have been in business for more than one year. Commissions are much cheaper; many people qualify for a 0% tax rate. Everyone else pays 15% or 20%. It depends on your marital status and your income.

How to Avoid Capital Gains Tax When Selling a Home

  • Check if you qualify for an exception: If you have taxable income from the sale of your home, you can always exclude some of it if you sell your home for business, health, or an "unforeseen event," according to the IRS. 

  • Lived in the house for at least two years: The two years do not have to be consecutive, but house flippers should be careful. If you sell a house you haven't lived in for at least two years, your income may be taxed. Selling in less than a year is particularly expensive because you may be subject to short-term capital gains tax, which is higher than long-term capital gains tax.

  • Save your home improvement receipts: The base price of your home usually includes what you paid to buy it, as well as any improvements made over the years. When the cost base is higher, exposure to capital gains tax may be lower. Renovation, additions, new windows, landscaping, fencing, new sidewalks, air conditioning are examples of things that can reduce your capital gains tax.


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