Capital Gains on Home Sales in Massachusetts Explained
Author Bill Gassett owns Maximum Real Estate Exposure.
One of the significant benefits of homeownership we have all realized over the last few years is a large increase in home equity. It doesn't take a rocket scientist to figure out that market values of homes have increased exponentially.
While your home is a place to live, it can also be an excellent investment. However, when it comes time to sell your Massachusetts home, Uncle Sam will want to get in on the action.
We will examine what to know about real estate capital gains and how much you can expect to pay when selling your house. Let's dive in.
What is a Capital Gain?
A capital gain is an increase in the value of an asset or investment over time. Capital gains occur when an asset is sold for a higher price than purchased. When a capital gain is realized, the seller is taxed on the difference between the sale price and the original purchase price.
Capital gains are taxed differently for different types of assets, but for the purpose of this article, we will focus on capital gains when it comes to the sale of a home.
Capital gains on house sales are taxed at the federal and state levels. The amount of tax owed will depend on an individual’s tax bracket and the amount of the capital gain.
When selling a home, the capital gain is calculated by subtracting the original purchase price, any related expenses, and any improvements made to the home from the home's sale price.
For example, if a home were purchased for $400,000 and sold for $550,000, the capital gain would be $150,000.
There is a Capital Gains Exclusion
One of the primary benefits of owning a home is the capital gains tax exclusion. The way the exclusion works is simple.
If your Massachusett home was the primary residence for at least two of the five years leading up to the sale, then the capital gains can be excluded from taxes up to a certain limit.
The exclusion limit is $250,000 for single taxpayers and $500,000 for married taxpayers filing jointly. Any gains over this amount are taxed at the applicable tax rate.
For example, in the above example, where a home was purchased for $400,000 and sold for $550,000, there is a $150,000 capital gain before considering any expenses.
Due to the exclusion clause, single and married couples would not pay any taxes on capital gains. There would have to be a profit of over $250,000 if single and over $500,000 if married.
What Do You Pay in Capital Gains When Selling a House Above The Exclusions?
What you pay in capital gains tax will depend on several factors, including short- or long-term capital gain, tax filing status, and income levels.
Let's look at the short and long-term capital gains tax rates for 2023.
Long-Term Capital Gains Tax Rates For Massachusetts Home Owners
If you have owned your home for at least two years, it is considered a long-term capital gain when you go to sell. The following are the income tax brackets on what you will pay when selling:
- Single: 0% up to $44,625
- Single: 15% between $44,625 – $492,300
- Single: 20% Over $492,300
- Married filing jointly: 0% up to $89,250
- Married filing jointly: 15% between $89,250 – $553,850
- Married filing jointly: 20% over $553,850
- Married filing separately: 0% up to $44,625
- Married filing separately: 15% between $44,625 – $276,900
- Married filing separately: 20% 0ver over $276,900
- Head of household: 0% up to $59,750
- Head of household: 15% between $59,750 – $523,050
- Head of household: 20% over $523,050
Short-Term Capital Gains Tax Rates For Massachusetts Home Owners
When you have owned a house for less than two years, taxes when selling are more expensive.
- 10 percent for single filers up to $11,000, up to 22,000 for married filing jointly, and up to $15,700 for the head of household.
- 12 percent for single filers between $11,101 – $44,725, $22,001 – $89,450 for married filing jointly, and $15,701 – $59,850 for head of household.
- 22 percent for single filers between $44,726 –$95,375, $89,451 – $190,750 for married filing jointly, and $59,851 – $95,350 for head of household.
- 24 percent for single filers between $95,376 – $182100, $190,751 – $364,200 for married filing jointly, and $95,351 – $182,100 for head of household.
- 32 percent for single filers between $182,101 – $231,250, $364,201 – $462,500 for married filing jointly, and $182,101 – $231,250 for head of household.
- 35 percent for single filers between $231,251– $578,125, $462,501 – $693,750 for married filing jointly, and $231,251– $578,100 for head of household.
- 37 percent for single filers above $578126, above $693,251 for married filing jointly, and above $578,101 for the head of household.
It's essential to realize that the income amounts of each tax bracket will differ depending on your filing status.
For example, single filers will have a different tax liability and, therefore, different income tax than married couples.
A married couple could file jointly or separately. A tax return and the amount of taxes you pay will differ based on your filing status.
Requirements For Taking a Tax Deduction on Your Massachusetts Home
The following are additional requirements you must meet when selling a house in Massachusetts.
- The property must be your primary residence (no investment properties).
- You must have lived in the property for two out of five years.
- Getting married can increase your capital gains tax benefits.
Improvements and Expenses Can Bring Down Your Taxable Capital Gains
It is vital to keep accurate records when owning a house, especially for any home improvements you make to the property. When it comes time to sell your Massachusetts home, these improvements can offset what you pay in capital gains taxes.
For example, replacing your windows or heating system can be deducted from your tax basis.
It's worth noting that there is a difference between improvements and repairs. You cannot deduct repairs. For example, replacing a roof is an improvement. Repairing a leaking roof is not.
Final Thoughts on Real Estate Capital Gains in Massachusetts
While the information provided here is meant to give you the basics of how capital gains tax laws work for Massachusetts property owners, it is vital to speak with a tax professional.
An individual's tax circumstances can vary from person to person quite a bit. Also, speak to a tax expert before filing your taxes.
Did you enjoy this advice on what to know about capital gains when selling a house in Massachusetts? See other real estate articles on NewsBreak for more timely tips and advice. Bill often writes about general real estate, mortgages, finance, moving, and home improvement.