Are Capital Gains From Real Estate Part of My Income?

Capital gains are one component of your taxable income.

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If you buy a house or land and later sell your property for a profit, you've made a capital gain. Before rolling the money into a new investment or spending it, you have to consider the tax implications. You must declare the transaction to the Internal Revenue Service in the year it took place and pay taxes on the gain, with some conditions and exceptions.

Basis and Proceeds

The amount you paid for the house is your basis, while the proceeds are the amount you earned from the sale. You can adjust these amounts by your transaction costs. If your net proceeds amount is higher than your basis, you have a capital gain on the sale, which you may have to report on IRS Form 8949 and on Schedule D. Carry over the capital gain figured on this form to Line 13 of your Form 1040, where you add it to your taxable income. If you take a loss on the property, you may not deduct it.

Long-Term and Short-Term

If you owned the property for more than a year, you have a long-term gain or loss. If you bought it and sold it within a year, you have a short-term gain or loss. Short-term gains -- whether drawn from real estate or other investments or property -- are taxed as ordinary income, while long-term gains are taxed at a maximum of 15 percent in 2012.

Exclusion Amount

The IRS may allow you to exclude up to $250,000 of your gain if you are single or married filing separately and $500,000 of your gain if you are married and filing a joint return. You must have owned and lived in the home at least two years out of the five years before the sale of the home takes place to take this exclusion. You can only exclude proceeds from a single house; you cannot apply the exclusion to more than one house owned concurrently.

Safe Harbor Exclusion

Because of the minimum two-year ownership and use rule, you normally would only be able to take the exclusion once every two years at a minimum. However, the IRS waives the rule and allows a pro-rated "safe harbor" exclusion if you had to move because of a change in employment at least 50 miles distant, if your doctor asks you to move for health reasons or for other unpredictable problems, such as damage to the house from a flood or other natural disaster.