If a homeowner fails to meet one of the IRS standards they will have to pay capital gains tax. The tax rate depends on whether they are short-term or long-term capital gains.
Short-term capital gains tax applies to properties sold within one year of being purchased. Essentially, the gain is treated like any other income and is taxed at the same rate as the taxpayer’s marginal tax bracket.
Long-term capital gains tax is charged on properties held for more than one year. The rate is calculated as either 0%, 15%, or 20%, depending on the taxpayer’s filing status and taxable income.
If a homeowner meets all of the IRS criteria, but their profit exceeds the threshold ($250,000 for singles and $500,000 for married filing jointly,) they will owe long-term capital gains tax on the overage. For example, if a married couple sells their home for $600,000 more than their cost basis, they will pay tax on $100,000.