When you invest in stock, you must claim the earnings made from that stock as a capital gain on your income taxes. If you choose to buy a house with those gains, you must still declare the stock earnings, though you may also declare the tax breaks that come with buying a house.
Any time that you sell a stock for more than the price that you originally paid for it, you have a gain as far as the IRS is concerned. The amount of that gain is the difference between the purchase price of the stock and the price for which you sell the stock, minus any fees that you had to pay to a broker to make the sale. Since these earnings are considered a capital gain, you pay a lower tax rate on them than you do on earned income.
First-Time Home Buyers
Occasionally, usually in times of a sluggish real estate market, the IRS offers first-time home buyers a credit on their taxes. In the years 2008 through late 2010, for instance, a tax break was available to first-time homebuyers. Though this tax break has expired, the U.S. government may approve another homebuyer credit when the need exists due to the economy. If you buy a home for the first time, always check the IRS website for available tax credits.
Other Home Owner Tax Breaks
Even if no first-time homebuyer tax break is available in the year in which a homeowner purchases a home, the homeowner may still declare several tax write-offs. Write-offs on a house include the interest on a mortgage up to $1,000,000, interest on a home-equity line up to $100,000 and local property taxes paid on the house. You cannot, however, claim expenses incurred due to repairs or improvements made to the home, unless you use the home-equity line to borrow the funds for the work.
How the Gains and Breaks Interact
When you report capital gains on stock and tax breaks for buying a house, you do so in two separate sections of IRS Form 1040. Capital gains from a stock sale go on line 13 in the “Income” section and require the completion of Schedule D along with the main form. Mortgage interest, property taxes and other house-purchase tax breaks go on line 40 in the “Tax and Credits” section and require the completion of Schedule A along with the main form. The deductions for the home purchase counteract the stock gains to limit your taxable income.
Alexis Lawrence is a freelance writer, filmmaker and photographer with extensive experience in digital video, book publishing and graphic design. An avid traveler, Lawrence has visited at least 10 cities on each inhabitable continent. She has attended several universities and holds a Bachelor of Science in English.