How much capital gains tax must I pay if I sell my house?

House on sheet of bills

Q. I know that after selling your home we have to pay a capital gains tax. What percentage does the government charge? How much time are we given to buy a new property and what type of property can we buy, can it be empty lots of land?

A. You may not have to pay any capital gains tax at all. How much you would have to pay, if anything, is determined by how long you have lived in the house and how much you will make in capital gains.

Probably the most common scenario is this: If you own your home and have used it as your principal residence for two of the last five years or have lived in it for the last two years, the first $250,000 in capital gains is tax-free. If you are married and the property is in both your names, your wife can claim another $250,000 worth of tax-free capital gains for a total of $500,000.

Capital gains are the difference between what you paid for the house plus money spent on major improvements, such as a new furnace or roof, a remodeled kitchen or bath, a new deck, landscaping and so forth and what you actually sell it for.

The old rule about having to reinvest your capital gains in a more expensive property within two years in order to avoid taxes vanished in 1997. If you buy a house for $250,000 and sell it for $500,000, the gain is yours tax-free and you can do with it as you wish. And you can do this every two years.

If you lived in the property for more than one year (366 days) but less than two years, you miss out on the big capital gains deduction. In this case your tax rate, which is termed a long-term capital gain, would depend on when you bought and sold it and what your overall income level is.

Currently, long-term capital gains may be taxed at 5%, 15%, 25% or 28% or a combination of rates. The long-term capital gains tax is, generally, much lower than what you pay on your regular income. The most common tax bracket for capital gains made in more than one year but less than two is 15%. Very few qualify for the 5% level or are pushed into the higher levels.

Short-term capital gains (gains made in less than one year) are taxed at the same rate as ordinary income. It is a taxpayer's income level that generally determines which capital gains rate is owed. If your gains push you into a higher bracket, you could be taxed at a higher rate of combination of rates.

As always, when dealing with issues as important as taxes we urge you to contact a CPA, professional tax preparer or a tax attorney prior to filing your income tax.

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