Capital Gains Tax

Capital gains tax is a federal tax placed on the profits from the sale of real estate or some other investment. The amount of profit from your home sale will determine whether you will owe capital gains tax.

To calculate your profit, a general rule is to start with the amount you originally paid for the house and add in the cost of all subsequent capital improvements, e.g., bathroom remodel or room additions, and subtract this amount from your sale price less commissions and other sale expenses. The subsequent total is your profit.

It’s unlikely that you’ll have to pay capital gains tax on the profit from your home sale thanks to the Tax Payer Relief Act of 1997. The law allows a single homeowner to earn up to $250,000 in tax-free profit on the sale of the home. Married couples filing jointly qualify for a $500,000 capital gains exclusion. Any profits beyond the exclusion may be subject to capital gains tax rates, which are based on a number of variables.

There are a few conditions you must meet in order to qualify for the capital gains tax exclusion: the property you’re selling must be your principle residence and you must have owned it and lived in it for at least two of the five years before the sale. The two- year period you’re required to have lived in the home needn’t be consecutive. For married couples, both spouses must have lived in the house for at least two years of the five years before the sale.

Homeowners/sellers may use the capital gains tax exclusion once every two years. A married couple can’t claim the exclusion if either spouse has used the exclusion within the past two years.