The recent skyrocketing of home prices over the past few years has resulted in many homeowners building substantial equity in their homes. This is quite the contrast from the period between 2008 through 2012 when many homeowners were forced to sell at a loss due to the economic downturn. While the gained equity for these homeowners is great, it is extremely important that you are well versed with capital gains taxes. To learn more about capital gains taxes and real estate, click on our previous article here. As for whether or not you will need to pay capital gains taxes upon selling your property, this will be determined by whether or not you are selling your primary residence, how long you have lived at the property for, and how much profit is being earned. We discuss the various scenarios below.
Short term capital gains taxes
For assets such as real estate that are held for less than a year, short term capital gains taxes will apply. Short-term capital gains are taxed as ordinary income. Therefore, the amount of taxes that you pay for these gains will be dictated by your tax bracket. As a helpful reference, the 2022 federal income tax brackets and rates are shown below:
| Tax Rate | Single Filers | Married & Filing Jointly | Heads of Households |
| 10% | $0 to $10,275 | $0 to $20,550 | $0 to $14,650 |
| 12% | $10,275 to $41,775 | $20,550 to $83,550 | $14,650 to $55,900 |
| 22% | $41,775 to $89,075 | $83,550 to $178,150 | $55,900 to $89,050 |
| 24% | $89,075 to $170,050 | $178,150 to $340,100 | $89,050 to $170,050 |
| 32% | $170,050 to $215,950 | $340,100 to $431,900 | $170,050 to $215,950 |
| 35% | $215,950 to $539,900 | $431,900 to $647,850 | $215,950 to $539,900 |
| 37% | $539,900 or more | $647,850 or more | $539,900 or more |
Long term capital gains taxes
In the event that you sell a property that is not your primary residence but you have owned it for longer than one year, your profits will be subject to long term capital gains taxes. As a helpful reference, the 2022 federal long term capital gains tax brackets are shown below:
| Tax % | For Unmarried Individuals, Taxable Income Over | For Married Individuals Filing Joint Returns, Taxable Income Over | For Heads of Households, Taxable Income Over |
| 0% | $0 | $0 | $0 |
| 15% | $41,675 | $83,350 | $55,800 |
| 20% | $459,750 | $517,200 | $488,500 |
Real estate capital gains deductions
When it comes to selling your primary residence, you may be eligible for capital gains deductions for your sale.
The deduction you receive when selling your principal residence is as follows:
- If you are single, you can make up to $250,000 in profits before paying any taxes on those earnings.
- If you are married, you can make up to $500,000 in profits before paying any capital gains taxes.
Requirements for taking a real estate capital gains deduction
In order to take the real estate capital gains deduction, the following requirements must be met:
- The property must be your primary residence. (This deduction is not available for the sale of investment property.)
- You must have lived in the home for two of the last five years.
- If you have a new spouse and he/she has used this exclusion within the last two years, it may impact your ability to use this exclusion in your home. In unique circumstances, it is best to consult with your tax advisor.
Summary
The IRS considers a home sale to be an event that triggers taxable income. During your closing, your attorney or closing agent will likely have you sign a form called the 1099-s. Basically, this form will ask you whether the sale of the property is a taxable event or not. Signing this form will alert the IRS that a taxable event is occurring. Therefore, it is critically important that you are truthful about the transaction. The alternative would likely result in a tax audit.
Do you have questions about real estate investing Contact Natasha at Live South Florida Realty, Inc. today. Also, be sure to download the Florida Home Search app for your smartphone or tablet as well!
