Many are often caught off guard by capital gains taxes when they sell a home, property, or stock. If you’re planning to sell your home, stock, or other property, it’s critical you understand these taxes and if you aren’t exactly sure what they are, you aren’t alone. The Pennsylvania Institute of Certified Public Accountants (PICPA) has fielded numerous questions on capital gains taxes from the public through PICPA’s free Ask a CPA service, and below are some of the key questions we’ve answered that you might find helpful for planning a major sale this year.
What Is a Capital Gain?
A capital gain is the difference between your basis (typically the purchase price you paid for the asset) and the sale price. The capital gains tax, therefore, is applied to the profit from the sale of property or an investment, and is on the gross sale price less all costs including basis (not the net proceeds). The sale of your home, other property, and investments such as stocks and bonds could trigger this tax.
Many people who sell their home can avoid paying this tax. If you’re a single filer and the profit on the sale of your home does not exceed $250,000, or you’re a married couple filing jointly with a profit that does not exceed $500,000, you do not have to pay tax on the gain. Anything above those amounts must be reported as a capital gain. Also, the exclusion is dependent upon whether the property was used as a primary residence for at least two of the five years leading up to the date of sale and whether you have used the gain exclusion on the sale of another personal residence within the past two years.
An exception to the two-year rule may be made if you’re forced to relocate due to a job change and did not meet the two-year ownership and use tests. A reduced maximum exclusion can be claimed on the sale of a home if the primary reason for the sale is due to a change in employment. This Q&A explains more about this exclusion.
What If I Own a Rental Home?
You might own a rental home or rent out part of your principal residence. Typically, any gain realized on the sale of an investment asset, including real estate, will be a taxable event. There could be exceptions, depending on the gain and whether there was non-principal residence usage of the property. If part of the property you own and used as a principal residence was rented out, you would pay capital gain taxes on just that portion upon a sale.
What If I’m Selling Stock?
Regarding the sale of stock, you will need to identify whether the capital gains are short- or long-term. Short-term is generally defined as gains from an asset held for a year or less; long-term gains are anything held for a year or more. This Q&A explains this in greater detail. There is also the possibility of deducting capital losses from your capital gains, which could minimize your overall tax liability from capital gains. There is a $3,000 limit on the excess of capital losses over capital gains you can deduct from other income such as wages in any tax year, but as this article further explains, you have the option to carry over the excess amount to future years.
Capital gains are typically taxed at both the federal and Pennsylvania state levels, but they are not taxed at the local level. This means they are not subjected to the local earned income tax by Pennsylvania towns and municipalities.
Your CPA Can Help
If you still have concerns before making a major sale, PICPA’s tax help page has more pointers on capital gains taxes. But no matter what your financial concerns are, your local CPA can offer expert advice and ideas. Turn to him or her with all your financial questions. To find a CPA in your area or for more financial tips, visit www.picpa.org/moneyandlife.