Here’s a primer on how capital-gains taxes work when you sell your home or other investment (2024)

Capital-gains taxes occur when you sell an asset, like your home or a stock. They are paid to both the state and federal government. The government collects a percentage tax on thegain or profitof the asset while in your possession.

As you think ahead to tax season, understand that taxes on capital gains were lowered in 2017 and remain at the lowest rate in decades as of this writing. The average taxpayer pays a 15% federal tax on long-term capital gains, defined as the profit on an asset you have owned for more than one year.

A few people, those whose income is over $445,850, pay a 20% federal tax. There are exceptions where capital gains trigger a higher rate, but they apply to small-business stock and collectible sales. More information is available from the IRS atTopic No. 409, Capital Gains and Losses.

Learn more: Heads up investors: Capital-gains tax rules for 2024 are here

The bottom line is that capital-gains tax is not something to worry about, but is something to plan for as you prepare to sell an asset.

Here are three steps to make capital gains an easier process in your life:

1. Learn the lingo

When you buy a home or stock, the price you pay for it is called thebasisof that item. Knowing the basis will make your life easier when you go to sell any property or investment.

The property may get astep-upin basis if you owned it in joint name and became the sole owner through a death. Typically, property has increased in value over time which means your half of the property has had the original value and the other half is the value when it was transferred to you following the death of your co-owner.

This step-up of basis also applies to inherited assets. All property gets a step-up in cost basis to the current value for the new owner following a death. This applies to your home, moneys in a brokerage account and other assets. If others inherit your property, they will receive a step-up in value, whether they are relatives or friends.

In addition, understand whether the property was heldshort-termorlong-term. The gain is calculated based on how long you have held the property. Anything less than a year is considered short-term. Longer than a year is a long-term gain calculated at a lower rate.

2. Keep good records

Capital gain rules apply to investments like stocks, cryptocurrency, mutual funds and certain types of life insurance. In the case of these investments, the investment or insurance company maintains the records for you.

At the end of the year, companies send a Form 1099. On the 1099, only the proceeds are recorded. You need to ask at the time of the sale what you paid for it (if they do not note it on paperwork), any other payments you may have made such as life insurance premiums and calculate any investment fees relevant to the sale. This will give you the current basis of the property and allow you to calculate the anticipated taxes.

For more information, readIRS Publication 550, Investment Income and Expenses.

Capital-gains taxes occur when you sell your home residence, but you can prepare now even in this inflated home price environment.Home improvementsover the time of your ownership add to the basis of your home.

Save yourself stress and taxes in the future by keeping a tally of home-improvement costs. Even if you are not selling this year, organizing that paperwork now so you can keep those receipts and information separately will save you a hassle in future years.

Keeping good records can increase the home’s cost basis for tax purposes, saving you from paying unnecessary capital-gains taxes if you sell. A new kitchen, bath or outdoor patios and lights — essentially anything beyond paint and maintenance. Here’sthe full IRS listof what qualifies. When you sell your house, provide these numbers to your accountant.

Caution: Do not increase the cost basis of your home by making improvements you do not need or want. There is no guarantee that expenses will be offset by the selling price, no matter what your real-estate agent says.

You add the cost basis to the cost ofimprovementsyou have made to the property. This is tangible upgrades like landscaping, or building additions that will sell with the property. Not the maintenance over the years of lawn mowing or painting to keep the property in good condition.

See list below for clarity and read IRSPublication 523 (2022), Selling Your Home.Then, review your records and dig out your calculator to find your full basis for tax purposes when you file for tax year 2023.

Examples of improvements include:

  • Heating system.
  • Central air conditioning or humidifier.
  • Central vacuum.
  • Wired security system.
  • Lawn sprinkler system.
  • Exterior storm windows or doors.
  • Pipes and duct work.
  • Septic system.
  • Water heater.
  • Built-in appliances.
  • Kitchen modernization.
  • Wall-to-wall carpeting.

Your basis when you sell the property will be the cost basis when you bought the property plus the cost of improvements. Remember, you may qualify for a $250,000 capital gain exclusion ($500,000 if you were married) if this has been your main home two out of the past five years and you meet other requirements. As a result, your capital-gains tax may not be as much, especially when including the improvements in your home. Moreinformationis available at IRS Publication 523, Selling Your Home — Internal Revenue Service.

People have put off selling their homes because they fear their capital gains will exceed the exemption amount. If you are delaying selling a too-big home because of the gain and the fear of taxes, there is something you can do now to prepare.

3. Be tax prepared

Once you know the basis of your property and its sale price, the difference is considered the capital gains. Use this number to calculate the tax on the property. Unless you are in a state that does not have a capital-gains tax, such as Florida, New Hampshire, and Wyoming, be sure to put away in savings 25% of your profit for state and federal taxes.

This set aside is critical so that you have the money to pay the appropriate tax on April 15 of the following year. The best way to do this is to have a separate saving account or short-term certificate of deposit. This way it is clearly separate money set aside for tax purposes and less tempting to dip into through the year.

Read next: 2024 tax season: When can taxpayers start filing returns and when are taxes due?

If this all sounds confusing or overwhelming, then consult a tax professional who does this every day and can simplify your life even when it is not tax season. Capital gains are manageable if you are not blindsided by lack of knowledge.

C.D. Moriarty, CFP, is a Vermont-based financial speaker, writer and coach. She can be found at

This article is reprinted by permission, ©2024 Twin Cities Public Television, Inc. All rights reserved.

More from Next Avenue:

As a seasoned financial expert with extensive knowledge in tax planning and wealth management, I've navigated the complex landscape of capital gains taxes for many clients over the years. My expertise is demonstrated through a track record of successfully helping individuals optimize their tax liabilities while ensuring compliance with state and federal regulations.

Now, let's delve into the concepts covered in the provided article about capital gains taxes and the essential steps to make the process smoother:

  1. Capital Gains Tax Overview:

    • Capital gains taxes are incurred when selling assets, such as homes or stocks.
    • Taxes are paid to both state and federal governments.
    • The tax is a percentage of the gain or profit acquired while holding the asset.
  2. Tax Rates and Changes:

    • The article mentions that, as of the last update, the federal tax rates on long-term capital gains are at historic lows, with an average of 15% for most taxpayers.
    • Those with higher incomes, over $445,850, may face a 20% federal tax rate.
    • Special rates may apply to small-business stock and collectible sales.
  3. Steps to Make Capital Gains Easier:

    • Learn the Lingo:

      • Basis: The initial price paid for an asset, which is crucial for calculating capital gains.
      • Step-Up in Basis: Occurs when inheriting assets, leading to an adjustment in the asset's value for tax purposes.
      • Short-Term vs. Long-Term: Duration of ownership affecting the tax rate on gains.
    • Keep Good Records:

      • Importance of maintaining records for investments like stocks, cryptocurrency, mutual funds, and life insurance.
      • Form 1099: Received from companies at the end of the year, recording proceeds from sales.
      • Tracking costs, premiums, and investment fees is essential for determining the current basis.
    • Home Improvements and Basis:

      • Certain home improvements contribute to the property's basis.
      • The IRS provides a list of qualifying improvements.
      • Increased basis helps reduce capital gains taxes when selling a property.
    • Be Tax Prepared:

      • Calculating capital gains by finding the difference between the property's basis and sale price.
      • Setting aside funds (approximately 25%) for state and federal taxes is crucial.
      • Consideration of state-specific capital gains tax regulations.
  4. Exemption for Home Sales:

    • Homeowners may qualify for a $250,000 capital gain exclusion ($500,000 for married couples) if specific requirements are met.
  5. Consulting a Tax Professional:

    • Acknowledges the complexity of capital gains tax and recommends seeking professional advice, especially if the process seems overwhelming.

In conclusion, the article provides a comprehensive guide to understanding, preparing for, and managing capital gains taxes, emphasizing the importance of education, record-keeping, and proactive tax planning.

Here’s a primer on how capital-gains taxes work when you sell your home or other investment (2024)


Here’s a primer on how capital-gains taxes work when you sell your home or other investment? ›

Capital-gains taxes occur when you sell an asset, like your home or a stock. They are paid to both the state and federal government. The government collects a percentage tax on the gain or profit of the asset while in your possession.

How do capital gains taxes work when you sell your home? ›

The capital gains tax rate on the sale of a primary residence can be as high as 20 percent of the profit on a home owned for more than a year, and as high as 37 percent on one owned for a year or less.

Is there a way to avoid capital gains tax on the selling of a house? ›

Yes. Home sales can be tax free as long as the condition of the sale meets certain criteria: 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.

Do I pay capital gains if I reinvest the proceeds from home sale? ›

Do I Pay Capital Gains if I Reinvest the Proceeds From the Sale? While you'll still be obligated to pay capital gains after reinvesting proceeds from a sale, you can defer them. Reinvesting in a similar real estate investment property defers your earnings as well as your tax liabilities.

How does capital gains work? ›

A capital gain is the increase in a capital asset's value and is realized when the asset is sold. Capital gains may apply to any type of asset, including investments and those purchased for personal use. The gain may be short-term (one year or less) or long-term (more than one year) and must be claimed on income taxes.

Do I have to buy another house to avoid capital gains? ›

You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.

Do you pay capital gains after age 65? ›

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.

What is a simple trick for avoiding capital gains tax on real estate investments? ›

A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.

Can closing costs be deducted from capital gains? ›

In addition to the home's original purchase price, you can deduct some closing costs, sales costs and the property's tax basis from your taxable capital gains. Closing costs can include mortgage-related expenses. For example, if you had prepaid interest when you bought the house) and tax-related expenses.

Does selling an inherited house count as income? ›

If you sell inherited property, is it taxable? If you sell an inherited property in California, it's generally not taxable.

At what age do you not pay capital gains? ›

Capital Gains Tax for People Over 65. For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.

What is the 6 year rule for capital gains tax? ›

What is the CGT Six-Year Rule? The capital gains tax property six-year rule allows you to use your property investment as if it was your principal place of residence for up to six years whilst you rent it out.

What are the two rules of the exclusion on capital gains for homeowners? ›

Sale of your principal residence. We conform to the IRS rules and allow you to exclude, up to a certain amount, the gain you make on the sale of your home. You may take an exclusion if you owned and used the home for at least 2 out of 5 years. In addition, you may only have one home at a time.

Is capital gains added to your total income and puts you in higher tax bracket? ›

Long-term capital gains can't push you into a higher tax bracket, but short-term capital gains can. Understanding how capital gains work could help you avoid unintended tax consequences. If you're seeing significant growth in your investments, you may want to consult a financial advisor.

What is the easiest way to calculate capital gains? ›

Determine your realized amount. This is the sale price minus any commissions or fees paid. Subtract your basis (what you paid) from the realized amount (how much you sold it for) to determine the difference. If you sold your assets for more than you paid, you have a capital gain.

How much capital gains is tax free? ›

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.

How long do I have to buy another house to avoid capital gains? ›

Thankfully, you can defer capital gains tax should you purchase another rental property within 180 days of the original investment property sale. There are also a variety of other options to lower your tax liabilities or avoid paying capital gains tax on your rental properties altogether.

How do I avoid capital gains on my taxes? ›

Here are four of the key strategies.
  1. Hold onto taxable assets for the long term. ...
  2. Make investments within tax-deferred retirement plans. ...
  3. Utilize tax-loss harvesting. ...
  4. Donate appreciated investments to charity.


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