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What Is IRS Capital Gains & Losses Tax – Calculate Rates & Deductions

2. Capital Gains on Selling Your Home

The IRS does consider money you make off selling your primary residence to be a capital gain. Luckily, they give you a lot of breaks on what can be a substantial profit. Here are the two most significant ones:

  1. No Tax on the First $250,000. This is a big one. You don’t have to pay capital gains taxes on the first $250,000 you make on the sale of your home ($500,000 if you file as married filing jointly) as long as you’ve owned the home and lived in it as your main home at least two years of the previous five, and didn’t take this break for any other home sale in the past two years. See IRS Publication 523 for further detail and special circumstances.
  2. Additional Expenses Are Included. The second break is that the cost basis of your home (for most assets, the amount you paid for it) has several common expenses added to it. You can subtract some closing costs (including legal, title, and recording fees) the cost of additions or substantial home improvements (but not repairs), and the real estate commission paid to your agent to sell the home. Raising the cost basis allows you to have a smaller gain, and in turn, pay less in capital gains taxes.

Unfortunately, in most cases if you have a loss on your home, you can’t claim it on your taxes.

3. Capital Gains on Selling an Investment Property

The rules for capital gains tax on the sale of an investment property differ from those governing the sale of your home. For example, you don’t get the nice $250,000 break, but you do get to deduct most of the expenses of buying, improving, or selling the home. Plus, while you own it, you get to deduct the expenses of maintaining it as well as depreciation against the rental income.

When you sell the investment property, however, that depreciation gets “recaptured” which could result in a larger capital gain (get a tax professional to help you here). However, unlike your primary residence, a loss on an investment property can be claimed as a capital loss on your taxes.

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