Don't buy a home without knowing this first

Capital gains taxes can a have a significant impact on future profits made by selling your home.

If you are looking to either flip a home or live in your home for less than two years, you should be weary of the capital gains tax. Basically, if you sell your home within 2 years from purchasing it, you will have to pay capital gains tax on the profit made from the sale of the home.

The amount taxed is determined by the tax bracket you fall in. If you’re in the 25-, 28-, 33-, or 35- percent income tax brackets (every tax bracket except the highest and lowest), you’ll have to pay 15% on the profits made from the sale. That percentage jumps to 20% if you are in the top tax bracket (individual earners making at least $418,400 or married couples filing jointly making at least $470,700).

If you’re planning on converting a residence into a rental property you should also be cognizant of this tax. You are not exempt from paying capital gains taxes in perpetuity after living in it for 2 years. You are only exempt from paying capital gains taxes if you have lived 2 of the past 5 years in the residence. So if you live in a home for two years then want to rent it out, you can only rent it out up to 3 years before selling it to avoid paying capital gains taxes.

Lastly, if you are an individual earner with an income at least $200,000 per year or married filing jointly with an income of at least $250,000 annually, you will have to pay an additional 3.8% tax on top of the 15% or 20% tax.