If you’ve owned your home for a long time or own a home that has appreciated substantially, you might be curious to learn more about capital gains taxes that you could encounter when you sell and what you can do to reduce them. Capital Gains taxes apply to you if you anticipate your profit being over $250,000 (for a single person) or $500,000 (for a couple).
Let’s break it down here:
LONG-TERM CAPITAL GAINS TAXES
Long-term capital gains taxes are paid on the profit you make when you sell real estate you have held for over one year. It is taxed at lower rates than short-term capital gains (which are taxed like regular income).
“PROFIT” IN REAL ESTATE
Profit is defined as the sale price of your asset minus your cost basis. Cost basis includes:
- the purchase price of the property
- closing costs including sales expenses
- qualifying capital improvements/ investments
REDUCING POTENTIAL CAPITAL GAINS TAXES
You can reduce potential capital gains taxes by increasing your cost basis through improvements that:
- increase the home’s value
- prolong its useful life
- or adapt it to new uses
Examples that may qualify include:
- new roof
- new hvac system
- replacing old windows with energy-efficient ones
- kitchen or bathroom upgrades
CAPITAL GAINS TAXATION EXEMPTIONS
If you have owned and used your home as your main residence for at least two of the five years prior to sale, you are exempt from capital gains taxes up to $250,000 for a single person and $500,000 for a couple.
Consult your accountant or tax attorney for exact guidance and calculations.
