How Much of Your House Sale Goes to Uncle Sam?

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The dreaded cap gains.

It's time to talk about everyone’s favorite type of capital: capital gains taxes. If it’s been a little while since you read my article on cap gains, here’s a refresher: capital gains are a certain type of tax that is specific to selling an asset. There are two types of capital gains taxes: short-term and long-term. Both are types of taxes, but triggered after different periods of time and have different rates.

Short-term capital gains apply when you sell an investment less than a year after purchasing. The short-term rates are currently the same as ordinary income tax. If you’re already a high-income earner that ordinary income tax rate adds up to... a shit ton. Long-term cap gains rates are much lower. Sure, it’s still a bummer any time you have to give money away, but it’s better when you can give less.

Selling a house has its own cap gains rules, too. But those rules aren't necessarily easy to follow.

Figuring out what your tax situation would look like if you were to sell your house feels like a maze where you need to pass through multiple checkpoints to figure out what rules apply to you. Let’s go through the maze together! I promise, you won’t get lost. Before we begin, I do want to say: some of these rules are different depending on where you live, so while this quiz will point you in the right direction, you should look at your local rules and regulations before budgeting in your cap gains.

Here we go:

Has this house been your primary residence for less than one year?

✅ If yes, you likely will have to pay short-term capital gains.

❌ If no, move onto the next question to figure out your tax situation.

Has this house been your primary residence for more than one, but less than two of the last years?

✅ If yes, you likely will have to pay long-term capital gains.

❌ If no, move onto the next question to figure out your tax situation.

Has this house been your primary residence for at least two of the last five years (and no, those two years don’t have to be consecutive)?

✅ If yes, move onto the next question to figure out your tax situation.

❌ If no, you’re headed into some murky tax waters and you’ll likely want to consult a financial advisor.

Are you married?

✅ If yes, you do not have to pay capital gains on the first $500,000 of profit from the sale of your house. If you made more than $500,000 in profit—first of all, congrats!— second, you have to pay long-term capital gains on all profits greater than that $500,000.

❌ If no move on to the next question

Are you single?

✅ If yes, you do not have to pay capital gains on the first $250,000 of profit from the sale of your house. If you made more than $250,000 in profit—first of all, congrats!— second, you have to pay long-term capital gains on all profits greater than that $250,000.

Ta-da!

There goes capital gains tax again, raining on our parade. This is a headache you’ll never have to deal with if you’re renting, just sayin’.

xo,

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