Before you sell a house, it’s smart to know how much of the sale price you’ll actually keep after taxes. Whether you’re selling your primary home, a rental, or a house you inherited, here’s a plain-English overview of capital gains tax for Rockford-area sellers.
This article is general information, not tax advice. Tax rules change and every situation is different, so please consult a CPA or tax professional before you sell.
What Is a Capital Gain?
A capital gain is the profit you make when you sell something for more than your basis. For a house, your basis is generally what you paid for it, plus certain closing costs, plus the cost of capital improvements like a new roof, an addition, or a remodeled kitchen. Your gain is roughly the sale price minus selling costs, minus your basis.
Keep receipts for improvements. They raise your basis and can lower your taxable gain.
Short-Term vs. Long-Term Gains
- Short-term: If you owned the property for one year or less, the gain is generally taxed as ordinary income.
- Long-term: If you owned it for more than a year, the gain generally qualifies for lower federal long-term capital gains rates.
Selling Your Primary Home: The Home Sale Exclusion
Many homeowners owe no federal tax on the sale of their home thanks to the Section 121 exclusion. If you meet the rules, you can generally exclude:
- Up to $250,000 of gain if you’re single
- Up to $500,000 of gain if you’re married filing jointly
To qualify, you generally must have owned the home and lived in it as your main residence for at least two of the five years before the sale, and not used the exclusion on another home sale in the past two years. Partial exclusions may be available in some cases, such as a move for work or health reasons.
Does Illinois Tax Capital Gains?
Illinois doesn’t have a separate capital gains tax, but gains are generally included in your income and taxed at the state’s flat income tax rate. If your gain is excluded federally under the home sale exclusion, it generally isn’t taxed by Illinois either, since the state starts from your federal income.
Selling a Rental Property
Rental properties don’t qualify for the home sale exclusion unless you lived in them as your primary residence under the rules above. Two things to plan for:
- Depreciation recapture: The depreciation you claimed (or could have claimed) over the years reduces your basis. When you sell, that portion of the gain is generally taxed at a federal rate of up to 25%.
- 1031 exchange: If you reinvest the proceeds into another investment property, a 1031 exchange may let you defer the tax. The deadlines are strict, so line up a qualified intermediary before you close.
Selling an Inherited House
Inherited property usually gets a stepped-up basis, meaning the basis is generally reset to the home’s fair market value on the date of the owner’s death. If you sell soon after inheriting, there may be little or no taxable gain. Getting an appraisal as of the date of death can help document that value.
Other Costs That Affect What You Keep
Taxes aren’t the only thing that cuts into your proceeds. Agent commissions, repairs, seller closing costs, and months of carrying costs can add up quickly. When you compare offers, look at your net proceeds, not just the sale price.
See What You’d Walk Away With
Modern Times Homes buys houses and rentals in Rockford and the surrounding area as-is, with no commissions and no repairs. We’ll give you a clear cash offer so you and your tax advisor can see exactly what you’d net. Fill out the form on this page to get your fair, no-obligation offer.