What is capital gains tax and does every homeowner need to pay it? The capital gains tax may amount to a large payment and it does not become important unless a homeowner wants to sell a home which has appreciated in value.

The IRS wants their share of the pie. When a homeowner has sold their property, some of the profit may have to paid in the form of a capital gains tax. With a few adjustments, homeowners may be able to pay less in capital gains than otherwise expected. What should those looking to sell a home, in Belle Meade or elsewhere, know about capital gains?

Learn more about capital gains tax and exclusions today.

What Are Capital Gains?

A primary home is considered a capital asset. When this asset appreciates and is sold at a profit, homeowners may have to pay a tax on the profit. The Capital Gains is the profit on the sale. The tax required by the IRS is the capital gains tax. This may not be applicable to all sales of a home. Those homes sold at a loss need to be recorded and as there is no profit, there is no related amount to be taxed. How long a home or asset is owned prior to its sale may influence how much tax needs to be paid after it is sold. In addition to the sale of a home, capital gains tax may need to be paid on other assets like arts and collectibles.

The seller is responsible to report profits on a home sale on a primary residence on Schedule D. Homes owned for over a year are reported as a long-term gain. Sales on homes owned for less than a year need to be reported as a short-term capital gain. Speak to a tax accountant to learn more about how to report profits and any possible exclusions to reduce tax burden.

The $250,000/$500,000 Exclusion

Those who are selling a main home at a significant profit may exclude as much as $250,000 in profit from taxation. Married couples get to exclude as much as $500,000 in profit. The $250,000/$500,000 exclusion can be applied to many types of residences, such as a house, apartment, condominium, fixed mobile home or stock-cooperative. Amounts in excess of the maximum stated will be reported as income and taxed. Some of the stipulations include:

• Residing in the home for a minimum of two of five years prior to selling the property.
• Documenting the need to sell a home from a physician for medical or health reasons in the case when an owner has resided in a home for less than the minimum.
• Documenting “unforeseen circumstances,” which may force the sale of a home under the minimum number of years required. Circumstances include a change in employment, divorce, and natural disasters.

These are some of the ways that homeowners who sell a home may not be taxed on a substantial part of the profits. Some sellers may qualify for a partial exclusion when a full exclusion is not possible. Tax laws regularly change and it would be a good idea to plan to take advantage of such an exclusion in advance of selling a primary residence.

Pay Less on the Sale of a Home

Those who are selling a home at a profit for the first time may not know of some of the exclusions to help them potentially keep more money in their pockets. Discuss potential options and current requirements with a trusted tax accountant.