Capital gains definition

Capital gains are the profits made when a capital asset — large items that people keep for long periods of time, like personal property, stocks, bonds, mutual funds, collectibles, or real estate — is sold.

There are two kinds of capital gains:

• Short-term capital gains are profits realized from selling an asset a person or organization has held for one year or less.
• Long-term capital gains are profits realized from selling an asset a person or organization has held for more than one year.

If a capital asset is sold at a loss, it’s called a capital loss.

How much are capital gains taxed?

The amount of capital gains tax depends on which type it is:

• Short-term gains are taxed at the seller’s ordinary income tax brackets (10%-37% for most taxpayers).
• Long-term gains are taxed at 0%, 15%, or 20%, depending on the seller’s taxable income and filing status.

An additional 3.8% net investment income tax may apply to individuals with modified adjusted gross incomes above $200,000 (for people who are single or head of the household or $250,000 (for married couples filing jointly).

What is the capital gains home sale tax exclusion?

Selling a house typically triggers a capital gains tax. However, someone selling their main home may be able to exclude (not pay tax on) up to:

• $250,000 of capital gain if they are single
• $500,000 of capital gain if they are married filing jointly

Any profit above the $250,000/$500,000 limit is taxable as a capital gain.

To qualify for the exclusion, a taxpayer generally must have:

• Owned the home for at least two years in the five years before selling.
• Used in the home as their main residence for at least two years during that same five-year period.
• Not claimed the exclusion on the sale of another home in the past two years.

If a taxpayer doesn’t meet the full two-year residency requirement, they may still qualify for a partial exclusion if the sale was due to a change in job, health, or certain unforeseen circumstances.