- When you sell a capital asset for more than you purchased it, the result is a capital gain.
- Short-term capital gains result from selling capital assets owned for one year or less.
- Long-term capital gains result from selling capital assets owned for more than one year.
- Assets that are subject to capital gains tax include stocks, bonds, precious metals, real estate, and property.
- Short-term gains are taxed as regular income, according to the U.S. income tax brackets.
- Long-term gains are subject to unique tax brackets that are generally more favorable than the regular income tax brackets.
|Tax Rates for Long-Term Capital Gains 2019 (2020)|
|Filing Status||0% rate||15% rate||20% rate|
|Single||Up to $39,375 ($40,000)||$39,376 to $434,55 ($40,000 to to $441,450)||Over $434,550 ($441,450)|
|Head of household||Up to $52,750 ($53,600)||$52,751 to $461,700 ($53,600 to $469,050)||Over $461,700 ($469,050)|
|Married filing jointly||Up to $78,750 ($80,000)||$78,751 to $488,850 ($80,000 to $496,600)||Over $488,850 ($496,600)|
|Married filing separately||Up to $39,375 ($40,000)||$39,376 to $244,425 ($40,000 to $248,300)||Over $244,425 ($248,300)|
Owner-Occupied Real Estate
There’s a special capital gains arrangement if you sell your principal residence. The first $250,000 of an individual’s capital gains on the sale of your principal residence is excluded from taxable income ($500,000 for those married filing jointly) as long as the seller has owned and lived in the home for two of the five years leading up to the sale. If you sold your home for less than you paid for it, this loss is not considered tax-deductible, because capital losses from the sale of personal property, including your home, are not tax-deductible.
For example, a single taxpayer who purchased a house for $300,000 and later sells it for $700,000 made a $400,000 profit on the sale. After applying the $250,000 exemption, they must report a capital gain of $150,000. This is the amount subject to the capital gains tax.
In most cases, significant repairs and improvements can be added to the base cost of the house. These can serve to further reduce the amount of taxable capital gain. If you spent $50,000 to add a new kitchen to your home, this amount could be added to the $300,000 original purchase price. This would raise the total base cost for capital gains calculations to $350,000 and lower the taxable capital gain from $150,000 to $100,000.
Investment Real Estate
Investors who own real estate are often allowed to apply deductions to their total taxable income based on the depreciation of their real estate investments. This deduction is meant to reflect the steady deterioration of the property as it ages, and essentially reduces the amount you’re considered to have paid for the property in the first place. This also has the effect of increasing your taxable capital gain when the property is sold.
For example, if you paid $200,000 for a building and you’re allowed to claim $5,000 in depreciation, you’ll be treated subsequently as if you’d paid $195,000 for the building. If you then sell the real estate, the $5,000 is treated as recapturing those depreciation deductions. The tax rate that applies to the recaptured amount is 25%.
So if you sold the building for $210,000, there would be total capital gains of $15,000. But $5,000 of that figure would be treated as a recapture of the deduction from income. That recaptured amount is taxed at 25%, where the remaining $10,000 of capital gain would be taxed at one of the 0%, 15%, or 20% rates indicated above.