Before you sell your house or property, you must take into consideration the capital gains tax you have to pay on the sale.
The government places a tax on the sale of a property because you are going to make a profit from the sale.
The government sees the sale of your house as an avenue to make money so they seize the chance to tax you on the money. Government tax you so that they can raise revenue for different services and programs.
What Are Capital Gains Taxes?
Almost all your possessions and properties are capital assets including personal items and investment products. Your possessions may include cars, stock or bonds, or real estate. Assuming you decide to put one of these assets up for sale, the profit you make from the sale will attract a tax known as capital gains tax.
Long-term capital gains happen when you sell a property you’ve had for more than one year. Short-term capital gains come about when you sell a property you’ve had for less than a year.
When Is Capital Gains Tax Paid On A Home Sale?
You have to pay capital gains on the profit you make after you sell your house or property. The period you’ve owned the property determines how much tax you owe, what your marginal bracket is, and if you can avoid paying the tax.
How do you know that the capital tax gains apply to you? Below are factors you can consider:
- The sale must be of a capital asset
- The property must have been in your possession for more than a year.
- You must have received the profit from the sale.
If you’ve successfully passed all these criteria, then you have to pay capital gain tax on the proceeds from the sale of your house/property.
How to Avoid Capital Gains Taxes When Selling a House
If you want to make gains from the sale of your property then you will have to owe capital gains taxes. However, there are ways you can avoid such taxes legally, they include:
- The 2-out-of-5-year rule:
You’re not obliged to live in the house for years in a row, but cumulatively. That ensures you pass the use and ownership tests. Consequently, you may qualify for an exclusion on the capital gains tax.
- Qualify for a partial exclusion:
According to IRS Publication 523, some situations and circumstances may enable you to avoid capital tax gain. If you sold your home due to certain circumstances like work, health, or an unforeseeable event, then you can be granted exclusion on capital gains taxes.
- Hold on to home improvement receipts:
There’s more to the cost basis of your house than just the amount spent to buy it. UpIt includes any renovations or repairs you made in the house. The higher your cost basis is, the lower your chances of paying capital gains tax.
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