This gives you a $300,000 taxable capital gain. Upon your death, your heirs will inherit the asset and receive a step-up in basis. So, for computing the long-term capital gains, the indexed cost of acquisition of the property is reduced from the net sale consideration. People who sell with a Redfin Agent get better service at a lower cost. Real estate basics: What is Long Term Capital Gain?. Judicial opinion is also divided on this matter. Of course, these are just two examples of possible areas of confusion, but the point is that if you run into anything you aren't 100% certain about, it's important to consult an experienced, qualified tax professional. Investing in real estate has always been one of the most effective paths to financial independnece. Gains from a house sale – that is, money above the purchase price and improvements made – can be subject to a federal capital gains tax. If you sell your home for a net gain of more than $500,000 (couples filing jointly) or $250,000 (singles), the gain in excess of the threshold is subject to capital gains tax. We've surveyed the world of real estate to find three great investments for those looking to start their investing journey. Before taking possession of the house what you owned was not a house but a right to acquire a house, which is, Computation of holding period in case of inheritance or gift, Computation of holding period for an under-construction property, Griha Pravesh Muhurat 2020: Best dates for a house warming ceremony. However, if the property is transferred after taking possession, the holding period should be counted from the date on which you took possession, to avoid any litigation. You may be wondering if you'll owe the IRS any taxes after you sell. See how Redfin Agents and technology get you the best results. Long-term gains are taxed at rates of 0%, 15%, or 20%, depending on your overall taxable income. This calculator is not intended to replace a professional estimate. That person would only be taxed on any profit from the sale beyond $250,000 if they are single, or $500,000 if they are married. Here's an example. Lookup your Redfin Estimate and home report. The Ascent's Best Cities for a High Salary and Low Cost of Living -- How Does the Real Estate Measure Up? As a final point, it's worth emphasizing (if it weren't obvious already) that capital gains taxes can be a rather complicated subject and there is quite a bit of gray area. If your home sale produces a short-term capital gain, it is taxable as ordinary income, at whatever your marginal tax bracket is. However, there are some circumstances where you may be required to make estimated tax payments, so be sure to read the IRS's guidance on the issue. In other words, if you've claimed $100,000 worth of depreciation on an investment property over the years, you can expect to pay depreciation recapture tax of $25,000 upon the sale. You just sold your house and pocketed a hefty $100,000 in profit after paying off the mortgage and closing costs. So, for assets either acquired during 2001-2002 or for which the fair market value as on April 1, 2001, is taken as the cost of acquisition, the base is 100 and it goes up year after year. To qualify, the home must have been your primary residence for at least two of the preceding five years, and you must have owned the home for at least two of the preceding five years (although the ownership and residence requirements don't necessarily have to happen in the same two years). Capital gains tax depends on your income and how long you owned your home. If you are using a screen reader, or having trouble reading this website, please call Redfin Customer Support for help at 1-844-759-7732. As a final note for this section, it's worth mentioning that this just refers to federal capital gains tax. Even if you aren't required, it could be a smart idea to send your estimated capital gains tax to the IRS as soon as the sale closes -- after all, do you really want to have to write a big check when tax time rolls around? A married couple can exempt up to $500,000 of their gains from tax so long as they meet certain criteria such as using the home as their primary residence for two out of the previous five years.