Exclusion and Taxable Gains
Once you've calculated your profit on the sale, figuring out how much, if any, of that gain is taxable is quite simple, thanks to the new capital gains rules for all houses selling after May 6, 1997. As long as the property has been used and owned as the sellers' principal residence for at least two of the five years before the sale, married couples are allowed to exclude up to $500,000 of profits from tax and single taxpayers up to $250,000.
- If your profits are less than your allowable exclusion, you owe no tax on the sale. If your profits are greater than your allowable exclusion, then you pay capital gains tax on whatever amount exceeds the limit. The actual rate you pay on this amount depends on your tax bracket and how long you've owned the house. However, if you've owned the house longer than 18 months, you'll pay no higher than 20 percent, which is the maximum long-term capital gains rate.
State taxes on housing profits
As most of us are aware, the federal government isn't the only government entity that assesses and collects taxes on income (which includes capital gains) -- the vast majority of states do as well.
Most states simply use the reported gain on your federal form to assess whatever percentage the state levies. You will probably have to separately itemize and report the gain on a capital gains schedule for your state.
Confirm all information with your accountant or attorney.