What Are Capital Gains?

When you sell a property for more than you paid for it, the profit is considered capital gains. This applies to any investment you’ve made, including real estate.

When you sell a property for more than you paid for it, the profit is considered capital gains. This applies to any investment you’ve made, including real estate.

Capital Gains on Primary Residences

If the home you’re selling is your primary residence, there are special rules that can reduce or even eliminate the capital gains tax.

For single filers, you can exclude up to $250,000 of the profit from your taxable income. For married couples filing jointly, that exclusion increases to $500,000.

To qualify for this exclusion, you must have lived in the home for at least two of the last five years before selling.

What Counts as a Primary Residence?

Your primary residence is the home where you live most of the time, and it doesn’t have to be where you’ve lived for your entire ownership of the property.

The IRS looks at how long you’ve lived in the home, not necessarily how long you’ve owned it.

shape How to Reduce Capital Gains Tax

There are strategies that can help you reduce your capital gains tax, such as:

Selling at the right time

the right time to take advantage of the market.

Improving your home

Before selling to increase its value, which can reduce taxable gains.

Offsetting gains

By selling other investments that have lost value.

The Importance of Planning Ahead

Understanding your potential capital gains tax exposure can help you make more informed decisions, whether you’re planning to reinvest in another property or take the proceeds elsewhere.

Consulting with a tax advisor or financial planner is always recommended when dealing with capital gains, especially in a high-value sale.

When Capital Gains Apply to Investment or Second Homes

If you’re selling a second home or investment property, you don’t get the same tax exclusions as with your primary residence.

In this case, you may have to pay capital gains tax on the profit you make from the sale.