What Is Capital Gains Tax on Real Estate?

by Cam Merritt ; Updated July 27, 2017
Gains from home sales are often free of capital gains tax.

In general, any profit you make from selling a piece of real estate is subject to federal capital gains tax, although the sale of a home is a big exception in most cases. When a real estate sale produces a taxable capital gain, the tax rate you pay depends on two factors: how long you owned the property and your income tax bracket.

What's Taxable

Capital gains tax applies to the difference between your “cost basis” in a piece of real estate and the sale price you receive for that property. Cost basis is what you paid for the property plus any money you’ve spent to improve it. If you had a cost basis of $100,000 for a property, for example, and then sold it for $125,000, you would have a capital gain of $25,000.

Exception for Homes

You don’t have to pay capital gains taxes on the first $250,000 in profit from a home sale — or the first $500,000 if you’re married — if you meet certain criteria. To qualify for this “exclusion,” you must have owned and lived in the property for at least two years total out of the five years preceding the sale. You can take this exclusion once every five years.

Short- and Long-Term Gains

If you own a piece of property for a year or less before selling it, any taxable gain you make from the sale is classified as a short-term capital gain. If you own the property for more than a year, it’s a long-term gain. Long-term gains are taxed at significantly lower rates than short-term gains.

Short-Term Rates

As of the time of publication, the capital gains rate for short-term gains was the same as your tax bracket rate — that is, the highest tax rate charged on your ordinary income. If you were in the 25 percent bracket, for example, you’d pay 25 percent on short-term gains. The tax brackets (and short-term rates) in 2015 were 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent. Tax rates can be changed by Congress, so check with the Internal Revenue Service for updated rates.

Long-Term Rates

Long-term capital gains rates also depend on your tax bracket. As of the date of publication, if you were in the 10 percent or 15 percent income tax bracket, you paid no tax at all on long-term gains. People in the 25 percent, 28 percent, 33 percent and 35 percent brackets paid 15 percent on long-term capital gains. For people in the top bracket, 39.6 percent, the long-term gains rate was 20 percent. Long-term capital gains rates are subject to change as well, so check the IRS for updated rates.

Net Investment Income Tax

An additional tax applies to certain higher-income taxpayers that may tack an additional 3.8 percent onto their capital gains tax rate. The Net Investment Income Tax applies to single taxpayers with a modified adjusted gross income of $200,000 and married couples with income above $250,000. If a taxpayer were in the top tax bracket, for example, this tax would increase the long-term capital gains rate from 20 percent to 23.8 percent and the short-term rate from 39.6 percent to 43.4 percent.

About the Author

Cam Merritt is a writer and editor specializing in business, personal finance and home design. He has contributed to USA Today, The Des Moines Register and Better Homes and Gardens"publications. Merritt has a journalism degree from Drake University and is pursuing an MBA from the University of Iowa.

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