The proceeds from the selling of your house may be taxed. Here's how it works and how you may avoid a hefty tax payment.

It feels nice to earn a high price for your property, but keep in mind that the IRS may want a piece of the action. This is due to the fact that capital gains on real estate might be taxed at times. Here's how to reduce or even prevent paying taxes on the selling of your home.

What is the structure of a capital gains tax?

The difference between what you paid for an item — your basis — and what you sell it for is taxed by the IRS and many states.

Capital gains taxes may be levied on investments such as stocks and bonds, as well on physical assets such as vehicles, yachts, and real estate.

• The good news regarding real estate capital gains

• Typically, the IRS permits you to exclude up to:

• If you're single, you may earn up to $250,000 in capital gains on real estate.

• If you're married and filing jointly, you may deduct up to $500,000 in real estate capital gains.

For example, if you purchased a property for $200,000 ten years ago and sold it for $800,000 today, you'd profit $600,000. If you're married and filing jointly, $500,000 of your gain may be exempt from capital gains tax (but $100,000 may be).

The bad news regarding real estate capital gains

If any of the following conditions are met, your $250,000 or $500,000 exclusion is usually null and void, and you must pay tax on the whole gain:

• You didn't live in the home as your primary residence.

• You held the property for fewer than two years out of the five years before selling it.

• You did not dwell in the home for at least two years before selling it in the five-year period before the sale. (Those who are handicapped, as well as those in the military, Foreign Service, or intelligence community, may receive a discount on this component; see IRS Publication 523 for more information.)

• You used the $250,000 or $500,000 exclusion on another house in the two years before the sale of this one.

• You purchased the residence during the last five years via a like-kind exchange (essentially trading one investment property for another, also known as a 1031 exchange).

• You must pay expatriate tax.

Still unsure whether you qualify for the exclusion? If our tool doesn't assist, scroll down for strategies to avoid capital gains tax on a property sale:

If it turns out that all or a portion of the proceeds from the sale of your home are taxable, you must determine the capital gains tax rate that applies.

If you held the asset for less than a year, you would be subject to short-term capital gains tax rates. The rate is the same as your regular income tax rate, often known as your tax bracket. (In what tax bracket am I?)

If you possessed the asset for more than a year, you would be subject to long-term capital gains tax rates. The rates are substantially lower; many persons qualify for a 0% tax rate. Everyone else pays either 15% or 20% of the total. It is determined by your filing status and income.

How to Avoid Capital Gains Tax When Selling a Home

Spend at least two years in the residence. The two years do not have to be consecutive, but home flippers should be cautious. If you sell a home you haven't lived in for at least two years, the profits may be taxed. Selling within a year is particularly costly since you may be liable to short-term capital gains tax, which is greater than long-term capital gains tax.

Check to see whether you qualify for a capital gains home sale exclusion. If you have a taxable gain from the sale of your home, you may be allowed to deduct part of it if you sold the property due to job, health, or "an unexpected incident," according to the IRS. For further information, see IRS Publication 523.

Keep all of your receipts for house upgrades. The cost basis of your house often comprises the purchase price as well as any renovations you've made over time. When your cost basis is larger, your capital gains tax exposure may be smaller. Remodels, additions, new windows, landscaping, fences, new driveways, and air conditioning installations are all examples of items that may reduce your capital gains tax.