Real Estate Capital Gains Tax: A Complete Guide [2021]

Key Takeaways


It’s tax season, and it’s to your advantage to know about the taxes and deductions that apply to you. The capital gains tax on real estate investment property is something you want to be familiar with if you own any real estate, whether it’s your home or another type of investment property. This is especially true if you recently sold, or plan to sell, your property, which is when capital gains tax goes into effect. While understanding capital gains tax on real estate may seem overwhelming at times, having a firm grasp of capital gains and respective tax requirements ensures that investors and property owners can properly benefit from their investments and be squared away with the IRS.

In this article, we will explore 2021’s capital gain tax rate, short-term vs. long-term capital gain tax rate, as well as how to avoid capital gains tax as much as possible if you believe your assets will be subjected to it. With Fortune Builders’ helpful guide, real estate investors and property owners can feel confident heading into the tax season.

What Is Capital Gains Tax On Real Estate?

The name says it all: capital gains tax on real estate simply refers to the tax levied on any gains made from a real estate sale. To clarify, capital gains are only realized when an asset is sold for more than it is purchased. Therefore, you may not be taxed on capital gains if you sell a property for less than you bought it for.

Generally, it’s rare to sell an asset for more than it was purchased for due to depreciation, but if an individual does sell their asset for more than they acquired it, the asset would then be classified as a capital gain. Capital gain can be applied for more than just real estate gains. It can also apply to a car, boat, or even rare piece of artwork that is sold for more than it was initially purchased.

How Much Is A Capital Gains Tax?

Now that we understand what capital gains tax is, let’s explore how much capital gains taxes typically are so that taxpayers can properly anticipate any payments that will need to be made. The tax rate for these capital gains isn’t an umbrella percentage but is based on numerous factors that affect the percentage of taxable gain. Within the context of real estate, if you were to sell a property, the capital gains tax you would owe depends on three main factors:

  • Duration of time in which the property was owned

  • The cost of owning the property, including any fees paid

  • Income tax bracket

  • Tax filing status

According to Nate Tsang, the Founder and CEO of Wall Street Zen, ” tax on a long-term capital gain in 2021 is 0%, 15%, or 20% based on the investor’s taxable income and filing status, excluding any state or local taxes on capital gains. On the other hand, short-term gains (assets held less than a year) are taxed on ordinary income rates and can go as high as 34%, depending on the income level. This is why it is advisable to hold an investment longer than a year so that you can take advantage of lower long-term capital gains tax rates.” We’ll explore short-term and long-term capital gains tax rates a bit further later on in the article.


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capital gains tax rate 2021

How To Calculate Capital Gains Tax

We’ve explored how capital gains tax on real estate works, let’s dive into how capital gains tax is calculated. If you’re unfamiliar with capital gains, here are some basics you should know.

Capital gains are simply the profit you make when selling an asset, such as stocks, real estate, and other investments. The formula for calculating capital gains tax for real estate will work similarly for any other asset, with slight intricacies that will be covered later. The formula for capital gains tax is:

Capital Gains = Selling Price – Original Purchase Price

The IRS (Internal Revenue Service) taxes investors on these capital gains, thus the name “capital gains tax.” Any time you make income from employment, the government will take a cut. Any income earned from selling assets is no different.

You may wonder if you will owe any taxes if an asset you own, whether real estate or stocks, increases in value. The answer is no. You will only owe capital gains tax when your gains are realized, which means you’ve sold the asset and pocketed the cash. When you’re still in possession of the asset, it’s known as an “unrealized gain” regardless of the duration.

Short-Term Capital Gains Tax

As we mentioned previously in the article, the capital gains tax structure varies significantly based on numerous factors. One of the first components of determining how much a capital gains tax will be is the duration of time it was owned. Capital gain taxes for real estate will be determined based on whether your real estate investment was short-term or long-term.

If you’ve owned property and sold it after less than one year, then you’ll be subject to the short-term capital gains tax rate. The rate is the same as the income tax rate based on your income bracket. Due to the rate being determined by your tax bracket, the capital gains tax rate for real estate held for less than a year can be pretty steep. This is why many investors will purchase and hold onto their assets for longer than a year to improve their tax-saving strategy.

Long-Term Capital Gains Tax

As we discussed, it’s more common for those looking to save money on capital gains tax to possess their assets for longer than a year. If you’ve owned property and sold it after a year or longer, then you fall into the long-term capital gains tax rate category. Remember, the long-term capital gains tax rates are 0%, 15%, or 20%, depending on your income and filing status. We’ve broken down the tax rate by income bracket in the next section. These rates will be much lower than being taxed under the regular income tax rate for short-term capital gains, so most people opt for long-term capital gains tax rates.

Capital Gains Tax Rate 2021

If you are filing your taxes as a single person, your capital gains tax rates are as follows:

  • If your income was between $0 and $40,400: 0%

  • If your income was between $40,001 and $445,850: 15%

  • If your income was $445,850 or more: 20%

If you are filing your taxes as married, filing jointly, your capital gains tax rates are as follows:

  • If your income was between $0 and $80,800: 0%

  • If your income was between $80,801 and $501,600: 15%

  • If your income was $501,600 or more: 20%

If you are filing your taxes as the head of household, your capital gains tax rates are as follows:

  • If your income was between $0 and $54,100: 0%

  • If your income was between $54,100 and $473,750: 15%

  • If your income was $473,750 or more: 20%

Last but not least, if you are filing your taxes as married, but filing separately, then your capital gains tax rates are as follows:

  • If your income was between $0 and $40,000: 0%

  • If your income was between $40,400 and $250,800: 15%

  • If your income was $250,801 or more: 20%

Capital Gains Tax On Real Estate Example

While we’ve explored what the capital gains tax rates of 2021 look like, let’s further explore how these figures would be applied for an asset that would be classified as a capital gain. There’s nothing better than an example to help pull all of these concepts together.

Let’s say that you are an individual who is filing single this year. Your annual salary is $65,000, which puts you at a tax rate of 22%. You just sold your first home for $15,000 more than the original purchase price. (You got a promotion and are moving to your company’s headquarters in a different city.)

If you owned the home for less than one year, then you’d be subject to short-term capital gains tax. If you recall, the short-term capital gains tax rate is the same as your income tax rate. At 22%, your capital gains tax on this real estate sale would be $3,300. ($15,000 x 22% = $3,300.)

If you owned the home for one year or longer, then you’d be liable for the long-term capital gains tax rate. Your income and filing status make your capital gains tax rate on real estate 15%. Therefore, you would owe $2,250.

2021 capital gains tax rate

How To Avoid Capital Gains Tax On Real Estate

Appreciation of real estate is a great thing, depending on how you look at it. However, as a seller, that could translate to thousands, or even hundreds of thousands, of dollars in taxes after a home sale.

Fortunately, there are a few things homeowners and investors can do to offset their capital gains tax on real estate:

  1. Offset Gains With Losses

  2. 1031 Exchange

  3. Convert Rental Property To Primary Residence

1. Offset Gains With Losses

One of the simplest ways to reduce your exposure to the capital gains tax is to offset the profits made from selling a home with losses that have been realized from another investment. While the Internal Revenue Service (IRS) taxes profits made from investments, investors can deduct losses from their taxable income. Otherwise known as tax-loss harvesting, this particular strategy reduces exposure to taxes levied on gains. By accounting for both gains and losses, investors can reduce the capital gains they are taxed on.

2. 1031 Exchange

The 1031 Exchange, named after Section 1031 of the IRS tax code, allows investors to put off paying capital gains taxes if they reinvest the proceeds made from selling a rental property into another investment.

The 1031 Exchange is a valuable tool for investors looking to shelter their profits from taxes, and it can be used as many times as necessary. However, taxes will be due the moment profits are realized. In other words, the 1031 exchange merely puts off paying capital gains taxes until sellers hold onto the proceeds from a home sale.

3. Convert Rental Property To Primary Residence

The IRS grants better tax benefits to those who sell a primary residence than investors who sell rental properties. It’s becoming commonplace for rental property owners to convert their investments into primary residences before carrying out the subject property’s sale. That way, they’ll be able to offset some of the capital gains taxes levied in their direction.

To make the deduction, homeowners must meet specific criteria set forth by the IRS. Namely, they must have owned the home for at least five years. Additionally, the homeowner must have lived in the subject property for two of the five years leading up to the sale. That’s an important distinction to make, as the amount of time the investor lives in the home (relative to the time it was placed in service) will help determine the amount allowed to be deducted.

Calculate Capital Gains Tax On Real Estate With FortuneBuilders!

If you’ve ever wondered if there is capital gains tax on real estate investment property sold for a profit, then the answer is yes. The good news is that these taxes are not that much more complicated than your income tax and are not realized until you’ve sold the property. If you’ve owned the property for less than one year, then you’ll end up owing more capital gains tax than if you’ve held onto it for more than one year. Thus, the tax structure incentivizes you to buy and hold real estate. By understanding the capital gain tax rate of 2021 and how capital gains taxes on real estate work, you can properly anticipate tax season and maximize your profits by strategically selling assets when the time is right.

Have you ever sold a property without realizing that you’d be subject to real estate capital gains tax? Did you own the property for over or under one year? Share your story and any tips you might have in the section below:


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