Capital gains are any profits realized from the sale of a capital asset such as stocks, bonds or real estate. Typically the purchase of real estate involves a mortgage loan from a traditional bank or a lender that specializes in real estate lending. When real estate is sold, any outstanding debt on the property as well as any fees incurred in the sale process are paid with the proceeds of the sale first. The remaining funds go to the seller. For the purpose of determining the capital gains, only the purchase price and the sale price are required.
Calculating Capital Gains on a Property Sale
Subtract the total amount you originally paid for the property at purchase from the total sale price of the property. If the result is a positive number, you have a capital gain of that amount. If the result is a negative number, you have a capital loss of that amount.
Determine if you have a tax liability on your capital gain. The IRS allows an exclusion for up to $250,000 in capital gains for the sale of a primary residence if you owned the home for a period of two or more years and the home was your main residence for two or more years.
If you owned or lived in the property for less than two years, you may still be entitled to an exclusion of a reduced amount. If you are married and file jointly, you may be entitled to an exclusion of up to $500,000 in capital gains. Any amount in excess of your qualified exclusion is taxable capital gains.
File the correct tax and information returns with the IRS for the sale of your property. Any reportable real estate sale must be reported to the IRS with form 1099S. If you realized a capital gain on the sale of property in excess of your exclusions, you must report these gains to the IRS with a form 1040 Schedule D.
References
- IRS Selling Your Home
- IRS Form 1040 Schedule D
- IRS Form 1099S
- Internal Revenue Service. "Tax Topic No. 409: Capital Gains and Losses." Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 19. Accessed Jan. 2, 2020.
- Tax Foundation. "An Overview of Capital Gains Taxes." Accessed Jan. 13, 2020.
- Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2019." Accessed Jan. 2, 2019.
- Internal Revenue Service. "Publication 523: Selling Your Home," Pages 2–7. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 49. Accessed Jan 2. 2020.
- Internal Revenue Service. "Publication 946: How to Depreciate Property," Pages 3–4. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses," Page 67. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Find Out if the Net Investment Tax Applies to You." Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 544: Sales and Other Disposition of Assets," Pages 34–36. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 544: Sales and Other Disposition of Assets," Pages 35–36. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses," Pages 56–57. Accessed Jan. 2, 2020.
- Internal Revenue Service. "About Schedule D (Form 1040)." Accessed Jan. 2, 2020.
- Internal Revenue Service. "Topic No. 412: Lump-Sum Distributions." Accessed Jan. 2, 2020.
- Internal Revenue Service. "Sales and Other Dispositions of Assets," Page 35. Accessed Jan. 2, 2020.
- Internal Revenue Service. "Mutual Funds (Costs, Distributions, etc.) 1." Accessed Jan. 13, 2020.
- Internal Revenue Service. "Publication 538: Accounting Periods and Methods," Pages 14–18. Accessed Jan. 2, 2020.
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