Your Home Sale and Capital Gains in Indiana

What is capital gains tax? 

Let's start with the basics: It's a tax on profits from selling assets like stock or real estate. When you sell these for more than you paid, the IRS taxes the gain. You can find more information on capital gains from the IRS website.

In Indiana real estate, capital gains are calculated by taking the final sale price and deducting the original cost. However, the tax on that gain has additional considerations:

• How long you owned the house
• Any fees you've paid — escrow, recording and appraisal fees, brokers' commissions (common in Indiana real estate transactions)
• Your federal income tax bracket (See the IRS tax brackets)
• Your marital status

If you owned your house for less than a year, the capital gains are short-term and taxed at your ordinary income rate (like wages). If you owned it for more than a year, they're long-term. In 2024, long-term capital gains rates are 0%, 15%, or 20%, depending on your federal income. You can find the most up-to-date information on long-term capital gains rates on the IRS website. These are typically lower than ordinary income tax rates.

Indiana is a state that has a state income tax, so you will also pay state taxes on your capital gains. You can find more information about Indiana's state income tax from the Indiana Department of Revenue.

Exclusions

Since most Hoosiers own their homes for more than a year, long-term capital gains rates usually apply. You might avoid some tax because real estate gains have different rules than investment capital gains. These rules apply only to your primary residence; if you sold a second property (investment, vacation, or rental) that wasn't your primary residence, you can't use these exclusions.

For most of these exemptions, you must have owned and lived in the house for two of the five years before the sale:

• You might defer capital gains if, after selling, you reinvest the profits into a new property within 180 days. This is often referred to as a 1031 exchange; you can find more information on 1031 exchanges on the IRS website [invalid URL removed].
• You might use a capital gains tax exclusion for your primary residence once every two years. Exemptions are $250,000 if single and $500,000 for couples filing jointly. (Some widowed individuals may qualify for the $500,000 exemption.) See IRS Publication 523, Selling Your Home for details.
• Itemized construction expenses can be added to your home's cost basis, reducing your tax liability. Improvements must be major—adding a bedroom, renovating a kitchen (like updating that outdated 70s kitchen in your Broad Ripple bungalow), installing a roof—and documented; estimates won't work. (See IRS Publication 523, Selling Your Home for more examples.)
• Selling costs like real estate agent fees (common when selling in Indiana's competitive market) and closing costs can be deducted from the sale proceeds to reduce your capital gain.
• You might qualify for a partial exclusion if you sold due to unforeseen circumstances—moving for a job at Cummins in Columbus, a health issue, divorce, a spouse's death, or a natural disaster (like flooding along the Wabash River). You may also qualify if you entered uniformed, foreign, or intelligence services. Again, IRS Publication 523 provides details on these exceptions.

Many Indiana homeowners have seen significant capital gains since purchasing their homes, especially in areas like Indianapolis, Bloomington, and Fort Wayne. You can manage the tax liability and keep more profit. Consult an Indiana tax professional to understand all the tax implications of selling your home in Indiana. They'll be familiar with both federal and Indiana state tax laws.

Tim Vicsik
RE/MAX 100
www.ND-Condos.com
Tim@TimVicsik.com 
(574) 329-9587