Real estate, including residential real estate, counts as a taxable asset. Any gains you make from a home sale must be reported to the IRS: You calculate and pay any money due when filing your tax return for the year you sold the property.
The seller must have owned the home and used it as their principal residence for two out of the last five years (up to the date of closing). The two years do not have to be consecutive to qualify. The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion.
You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion.
If you owned and lived in the home for a total of two of the five years before the sale, then up to $250,000 of profit is tax-free (or up to $500,000 if you are married and file a joint return). If your profit exceeds the $250,000 or $500,000 limit, the excess is typically reported as a capital gain on Schedule D.
If you sell your primary residence, you qualify for an exemption from capital gains up to $250,000 for an individual or $500,000 for a couple filing jointly. In the past, this exemption was restricted to people who bought another house or reached a threshold age, but that's no longer the case.
Current tax law does not allow you to take a capital gains tax break based on age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales. However, this exclusion was eliminated in 1997 in favor of the expanded exemption for all homeowners.
Thanks to the IRS's "Section 121," single tax filers can deduct up to $250,000 of a capital gain, while joint filers can write off up to $500,000. Even so, to qualify you must pass an “ownership and use” test: You must have lived in your home for at least two years over a five-year period before selling.
If you sell a house or property in one year or less after owning it, the short-term capital gains is taxed as ordinary income, which could be as high as 37 percent. Long-term capital gains for properties you owned for over a year are taxed at 0 percent, 15 percent or 20 percent depending on your income tax bracket.
If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets.
Income limitations: Selling your home does not directly impact your eligibility for Social Security benefits. However, if you earn income from the sale, it could potentially affect the taxation of your benefits or eligibility for certain assistance programs.
Use a 1031 Exchange
A 1031 exchange, a like-kind exchange, is an IRS program that allows you to defer capital gains tax on real estate. This type of exchange involves trading one property for another and postponing the payment of any taxes until the new property is sold.
Short-term capital gains are taxed as ordinary income at rates up to 37 percent; long-term gains are taxed at lower rates, up to 20 percent.
In this case, you could exempt up to $250,000 in profits from capital gains taxes if you sold the house as an individual, or up to $500,000 in profits if you sold it as a married couple filing jointly.
For 2023, you may qualify for the 0% long-term capital gains rate with taxable income of $44,625 or less for single filers and $89,250 or less for married couples filing jointly.
Capital gains tax rates
A capital gains rate of 0% applies if your taxable income is less than or equal to: $44,625 for single and married filing separately; $89,250 for married filing jointly and qualifying surviving spouse; and. $59,750 for head of household.
Typically, when a taxpayer sells a house (or any other piece of real property), the title company handling the closing generates a Form 1099 setting forth the sales price received for the house. The 1099 is transmitted to the IRS.
Yes. Form 1099 is used to report non-employment income to the IRS. There are up to 20 different types of 1099 forms. 1099-S is one of those types, and it's used for reporting capital gains on real estate transactions.
Determine whether you meet the residence requirement.
If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time.
Namely, the IRS doesn't treat proceeds from a cash-out refinance as income. Instead of selling your property and triggering a capital gains tax, you secure a larger loan, pay off the old mortgage, and take out the difference as cash.
This means right now, the law doesn't allow for any exemptions based on your age. Whether you're 65 or 95, seniors must pay capital gains tax where it's due.
Losses on your investments are first used to offset capital gains of the same type. Short-term losses are first deducted against short-term gains, and long-term losses are first deducted against long-term gains.