Capital gains tax on home sales in Connecticut: How much will you owe?

Selling a home in Connecticut can yield significant profits, but it's crucial to understand the tax implications.One of the most significant factors to consider is capital gains tax—which can take a bite out of your profits if you’re not prepared. 

Whether you're selling a property you’ve lived in for years or an investment property, it’s essential to know how much tax you could owe and how to navigate these costs effectively. 

This guide will walk you through the basics of capital gains tax in Connecticut, including federal and state rates, exemptions, and strategies to minimize your tax liability.

Understanding Capital Gains Tax

Capital gains tax is levied on the profit from the sale of an asset, such as real estate. The gain is calculated by subtracting your property's cost basis—the original purchase price plus any qualifying improvements—from the selling price.

For example, if you purchased a home for $300,000 and made $50,000 in improvements, your cost basis would be $350,000. Selling the property for $500,000 would result in a capital gain of $150,000.

There are two types of capital gains to consider for tax purposes:

• Short-term capital gains: Profits from selling assets held for one year or less. At the federal level, these gains are taxed at the same rate as ordinary income, which is generally higher than the rate for long-term gains.‍
• Long-term capital gains: Profits from selling assets held for more than one year. These gains benefit from preferential tax rates at the federal level, making them more tax-efficient compared to short-term gains.
  

Federal Capital Gains Tax Rates

At the federal level, capital gains are taxed based on your income and filing status. As of 2024, the rates are:

• 0% Rate: For single filers with taxable income up to $47,025; married filing jointly up to $94,050; head of household up to $63,000.
• 15% Rate: For single filers with taxable income between $47,025 and $518,900; married filing jointly between $94,050 and $583,750; head of household between $63,000 and $551,350.
• 20% Rate: For incomes exceeding the upper thresholds of the 15% rate.
  

Additionally, a Net Investment Income Tax of 3.8% may apply to individuals with high incomes (over $200,000 for single filers and $250,000 for married couples filing jointly). This tax applies to certain investment income, including capital gains.

Connecticut’s Capital Gains Tax

Connecticut taxes capital gains as ordinary income, with rates ranging from 3% to 7%, depending on your income level. For most taxpayers, the highest rate is 7%. High-income earners may be subject to an additional surtax, known as the Pease limitation, which affects high earners' itemized deductions.

Exemptions and Exclusions

Both federal and state laws offer exclusions for the capital gains tax:

• Federal Exclusion: Homeowners can exclude up to $250,000 (single filers) or $500,000 (married filing jointly) of capital gains if the property was their primary residence for at least two of the five years preceding the sale.
  
• Connecticut Exemption for Seniors: Individuals aged 65 or older may qualify for a once-in-a-lifetime exemption on the sale of their principal residence, provided they've towned and maintained it as such for five of the eight years leading up to the sale. This exemption has no dollar limit and applies solely to state taxes. For federal purposes, the homeowner would still need to meet the primary residence criteria to exclude gains.
  

Calculating Your Tax Obligation

Consider a scenario where you're a single filer with taxable income of $80,000, including a $50,000 gain from your home sale. After applying the federal exclusion, this gain may not be taxable federally. However, for Connecticut taxes, this gain would be taxed at your applicable income tax rate, which is likely 7% for most taxpayers.

Strategies to Minimize Capital Gains Tax

• Adjust your cost basis: Include the costs of significant home improvements in your cost basis to reduce the taxable gain.
  
• Timing the sale: If possible, plan the sale when your income is lower to benefit from reduced tax rates.
  
• Consult professionals: Engage with tax advisors or real estate attorneys to explore all available exemptions and strategies. They can help ensure you're in compliance with both state and federal laws.
  

Conclusion

Understanding capital gains tax is essential for Connecticut homeowners considering selling their property. By familiarizing yourself with federal and state tax laws, available exemptions, and strategic planning, you can optimize your profits and ensure compliance. Always consult with a tax professional or real estate attorney to tailor strategies to your specific situation.

Need an experienced Connecticut real estate attorney for your home sale?

Attorney Charlene Pederson has over 30 years of experience guiding Connecticut clients through residential real estate closings. If you need a knowledgeable attorney to handle your next transaction, contact her today at charlene@pedersonlawct.com or 203-900-4371.

We proudly serve homebuyers and sellers in Greenwich, Stamford, Darien, New Canaan, Westport, Norwalk, and Wilton.