Real Estate Capital Gains Rules

Capital Gains Tax Basics

• Capital gains must be reported on your annual income tax return. Capital gains include profits realized from the sale of almost any type of property, including personal real estate such as homes, second homes and vacation homes and investment properties such as vacant land and rental properties. A capital gain only occurs if the amount you get when selling property is greater than the amount you paid when you bought it. If you sell real estate for less than its original price, it is a capital loss.
  
  

Long-Term vs Short-Term Capital Gains

• Capital gains are divided into two main categories for tax purposes: short-term and long-term capital gains. According to the IRS, long-term capital gains are profits realized from the sale of an asset that you hold longer than a year. TurboTax states that the highest long-term capital gains tax rate investors face is 15 percent (it may be lower if you are in a low-income bracket.). On the other hand, the short-term capital gains tax rate is the same as your normal income tax rate. For high-income investors, short-term capital gains taxes can exceed 30 percent.
  
  

Capital Gains on Homes

• While the sale of real estate is subject to capital gains tax, special rules apply to the sale of your primary residence. According to Bankrate, the government grants a $250,000 exemption ($500,000 for married couples) from the capital gains tax when you sell your primary residence. In other words, if you made $250,000 or less in profit from selling you home, you wouldn't owe any capital gains tax. Bankrate says that for a home to qualify as your primary residence you must have lived in it for two of the past five years.
  
  

Considerations

• Holding onto real estate investments for at least a year will avoid the short-term capital gains rate. On the other hand, you must pay real estate taxes on every property you own; real estate taxes are tax deductible. If you take out mortgages to purchase a home or second home, you may be able to deduct the interest you pay on the mortgages from your taxes.