Selling a property can help liquidate funds, but you should understand the tax implications*, especially regarding capital gains. Capital gains tax is a tax on the profit made from the sale of an asset (such as real estate). In the US, capital gains tax applies to the sale of property that has increased in value since its purchase. Whether you’re selling your primary residence or a secondary property, here’s what you need to know about capital gains tax:

Selling a Primary Residence + Capital Gains Tax:

For many homeowners, their primary residence is their most significant asset. Individuals may be eligible for a substantial tax break when selling a primary residence. The IRS allows a capital gains exclusion of up to $250,000 for single filers and $500,000 for married couples filing jointly. This means that if the profit from the sale of the primary residence is within these limits, you may pay no federal tax.

To qualify for this exclusion, homeowners must have owned and used the property as their primary residence for at least two of the five years leading up to the sale. This exclusion can substantially benefit homeowners looking to downsize, relocate, or cash in on their investment.

Looking for more selling tips and advice? Read these posts next:

• How to Sell Your Parents’ Home
• Should You Sell Your DC Home and Move the Florida?
• Should You Sell Your Mortgage-Free Home?

Selling a Secondary Residence + Capital Gains Tax:

Selling a secondary property, such as a vacation home or investment property, can be more tricky as the profit from the sale of a secondary property is generally subject to capital gains tax. The tax rate applied to capital gains depends on the seller’s income and the duration for which the property was held.

If the property was owned for one year or less before being sold, the profit is considered a short-term capital gain and is taxed at the individual’s ordinary income tax rate. On the other hand, if the property was held for more than one year, the profit is classified as a long-term capital gain and is subject to a lower tax rate, typically ranging from 0% to 20%, based on the seller’s income.

For more information on selling a secondary property, click here. 

Also, check out our blog on how to sell your rental property here. 

1031 Exchange:

A 1031 Exchange can allow you to defer capital gains tax on the sale of an investment property. It allows the seller to reinvest the proceeds from the sale into a similar “like-kind” property, deferring the capital gains tax. This strategy can benefit real estate investors looking to diversify their property portfolio without incurring immediate tax liabilities.

It’s important to note that certain rules and timeframes apply to 1031 exchanges, so it’s crucial to work with a qualified intermediary and adhere to the IRS guidelines to ensure compliance.

For everything you need to know about 1031 Exchanges, check out our blog here. 

The Bottom Line:

Understanding capital gains tax is essential for anyone selling property in the US. Knowing the tax implications helps sellers make informed decisions and minimize their tax burden, whether a primary residence or a secondary property. Consult with a tax professional and an experienced real estate advisor who can provide personalized guidance based on individual circumstances and financial goals.

In conclusion, capital gains tax can significantly impact the net proceeds from the sale of property, making it crucial for sellers to plan and strategize accordingly. By staying informed and exploring available tax-saving options, individuals can confidently navigate the complexities of capital gains tax and maximize their financial outcomes when selling property in the US.

*DISCLAIMER – This blog is not intended to provide tax advice. We are not tax advisors! Please contact us for names of well-qualified tax advisors if you’d like more information.

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If you’re looking to buy or sell in Northern Virginia (or anywhere in the US), we’d love to help. Contact us today! Call us directly at 703-362-3221 or email sue@thegoodhartgroup.com or allison@thegoodhartgroup.com.