If there’s one thing we can count on the government for, it’s finding ways to get their hands on our money. One ingenious method the IRS employs, along with many other national revenue agencies across the world, is capital gains tax. You may have heard this term before. But you might not think it applies to your incoming home sale. After all, capital gains tax is just for rich people, right?

Wrong. Capital gains tax is something that everyone who plans to sell, well, anything, needs to know about. If you’re planning on selling your home, that means you, too!

Assets, basis and tax

A capital asset is something you own for reasons of pleasure, investment, or any other personal purpose. It’s not something that comes into your business. It could be your car, it could be an art piece, or – more pertinently – it could be real estate. It’s something you purchased that you could potentially sell.

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The basis is what you originally paid for that asset. Now let’s say you sell that asset. The difference between the selling price and the basis is called either a capital gain or a capital loss. If it’s higher than the basis, then you’ve made a profit, otherwise known as a capital gain. Well done! You now have to pay capital gains tax. How much tax you have to pay will depend on several factors, including your usual income tax bracket. Figure out how to calculate capital gains tax to get a head start here.

Change basis!

During the time you own the item, what counts as the basis can actually increase. Any tax you’ve had to pay on the item throughout your ownership is added to the basis. So is the cost of postage, if it was sent to you. If it had to be installed, those charges would also be added to the basis. If you made any improvements to it to increase its value, then the cost of those improvements is added to the basis, too.

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Basically, any of the costs you sank into developing your home is added to the basis. Let’s say you bought the house for $400,000. Then you spent $20,000 on renovations. Then you spent $500 fixing the roof. Then you spent $1000 on a new TV. That brings your basis to $420,500. (The TV doesn’t count. That’s a separate capital asset!)

What is your property type?

Your house is a capital asset. However, the capital gains tax you’ll receive will depend on how you’ve been using that property. It’s important to understand the difference between principal residence and investment property.

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Your principal residence is the property you live in. The IRS define a property as such if you’ve lived in it for two of the five years that preceded the sale. If you’re selling your principal residence, then you can make up to $250,000 in capital gains without a tax being levied. In most cases, that means that people selling their primary residence won’t have to pay this tax at all.

But let’s say the property you’re selling was just an investment. A second home, in other words. You didn’t live in it; it was just a home you’d purchased to eventually sell. (Alternatively, it’s only been your primary residence for under two years.) In that case, you’ll probably be paying capital gains tax on every penny of profit you make.

chrisHome SaleCapital Gains Tax,Home Sales
If there’s one thing we can count on the government for, it’s finding ways to get their hands on our money. One ingenious method the IRS employs, along with many other national revenue agencies across the world, is capital gains tax. You may have heard this term before. But...