How to Calculate Capital Gains Tax on a Home Sale

No one likes a surprise when tax season rolls around. So, if you plan on selling your house this year, it’s wise to know what obligations are in store. 

You’ll want to learn how to project capital gains tax. This tax liability arises on the sale of a home that’s appreciated in value, on which you’ll earn a profit. Much like any other forms of income, earnings on home sales are taxed. So, before counting up your earnings, figure in this expense.

Here’s everything you need to know about capital gains tax and how to calculate it.

What is a capital gain? 

A capital gain (or loss) is equal to the difference between the sale amount of an asset (like a home) and the original purchase price. Suppose you bought your home for $300,000 but sold it for $700,000. You’ve earned a capital gain of $400,000.

There are two categories of capital gains: short- and long-term. Short-term capital gains apply to earnings on an asset you held for less than a year before selling. Long-term capital gains are those earned on an asset you sold after having it for at least one year. 

What is capital gains tax on real estate?

The Internal Revenue Service (IRS) requires that taxpayers claim capital gains on their tax returns, as the sale of an asset that’s increased in value is considered a “taxable event.” Capital gains tax applies to all asset sales—including (but not limited to) real estate. So long as you sell your home for more than the purchase price, you could be liable for this tax obligation. 

There are a few other factors to consider, though. Your taxable income bracket, the length of ownership, and your filing status (i.e., married or single) can all determine to what extent you’ll pay capital gains tax on a real estate sale (or if you owe this tax at all).

Do I need to pay capital gains tax? 

Some folks are exempt from capital gains tax, and it’s only natural to wonder if you fall into that category. Single filers can exclude up to $250,000 from their tax liabilities, and married people who file jointly can exclude up to $500,000. 

The IRS applies a use test and an ownership test to determine a taxpayer’s exemption eligibility. You must have owned the home and used it as your primary residence for a total of two of the five years leading up to the sale. These two-year periods can overlap or be separate (that is, you could own the home for two years without it being your primary residence so long as it fulfills that role for another of the two years in the five-year period). 

You can accurately determine your eligibility by consulting with a certified public accountant (CPA) or reading the IRS’s full stipulations. There are unique conditions for widowed taxpayers, anyone who acquired property through a 1031 exchange, and people not living in their assets (i.e. folks with investment properties). So, it’s worth considering the fine print.

Calculating capital gains tax, with an example

Before calculating capital gains tax, you must calculate your capital gains. In other words, determine how much you earned (or will earn) on a sale. Using the example from a previous section of a home purchased for $300,000 and sold for $700,000, the capital gains would be $400,000. 

Depending on applicable exemptions, you may be able to exclude an amount from these capital gains. For example, if you were to earn those $400,000 as a single taxpayer, you could take $250,000 in exclusions off the top, leaving you with $150,000 in taxable gains. If you did not qualify for a capital gains tax exclusion, you’d consider the full $400,000 in your math. 

With this data point in hand, you can begin calculating the applicable tax. You’ll need to determine the percentage assigned to you, which depends on your income level, geographic location, and tax filing status. Some locations, like Florida and Nevada, do not have capital gains taxes, meaning you’ll save on the state level in these places. However, federal taxes are applied to home sellers nationwide. 

You’ll also need to ensure that the percentage corresponds to the amount of time you’ve held the property. This is an important factor because long-term capital gains tax rates and short-term capital gains tax rates differ.

A real estate capital gains table can provide the correct percentage amounts for the state and ownership term and more personal factors, like your filing status and income tax bracket. A single person who makes $60,000 falls into a different percentage category than a couple or head of household earning this same amount, seeing as income thresholds are applied differently based on people’s filing statutes. It’s worth pinpointing the right percentage for your situation before getting too far in your calculations. Titus’ capital gain calculator can make the math simple. Note: Titus’ tool uses a 15 percent federal rate in calculations. Your actual rate may be higher based on your filing status and tax bracket.

Check for tax deductions

If you need to pay capital gains taxes, you may get a bit of a break by considering money spent on renovations in your calculations. Taking the example of the $300,000 house that sold for $700,000 and supposing the owner had done $100,000 of renovations, the actual delta between the purchase and sale price might only be $300,000, not $400,000, thanks to those home improvements. If you plan to make this case, just be sure to keep your receipts so you can prove expenses to the IRS. 

There’s some more good news: Even if you use financing to make these upgrades to your property, your spending can result in a tax break. Such is the case if using Titus funding, which you can apply toward pre-sale renovations and deduct from your taxable capital gains. 

Titus CLoCs: Earn more and pay less in taxes

Homeowners who make renovations and repairs to their properties before going to market boost the value of their homes. And you’ll keep more of your earnings if less goes to capital gain taxes thanks to the home improvement investment you made. 

Team up with a Titus agent and work with one of the savviest agents in the industry. Plus, Titus partner agents have exclusive access to closing lines of credit (CLoCs): zero-interest, zero up-front loans for repairs and renovations. Discover how it works here.