The basics of capital gains tax

Albert Einstein famously said that "the hardest thing in the world to understand is the income tax." However, today's homeowners would probably disagree with Einstein. Many find that understanding the ins and outs of capital gains tax is at least as difficult. The good news is that you don't have to be Einstein to understand what this tax means for your investment.

"Capital gains includes the profit made from the sale of your home, and it usually receives more favorable tax treatment than regular income," said Jim McEneaney, senior regional vice president of Coldwell Banker Residential Brokerage. "The amount of tax owed, if any, varies based on a number of factors. Talk to your Realtor and tax advisor before putting that 'For Sale' sign in the yard."

Here's a 101 on capital gains tax:

Marital status. A single homeowner can keep the first $250,000 of profit from the sale of their primary home. This amount doubles to $500,000 for married couples filing jointly.

Length of ownership. Owners must use their home as a primary residence for at least two years to avoid capital gains tax. Those who don't meet this minimum requirement may still qualify to receive a portion of the profit tax-free if the sale was necessitated by a change in health, employment or unforeseen circumstances.

Adjusted purchase vs. sales price. Homeowners should hold on to all documentation of improvements and sales expenses, especially if they expect to reach or exceed their tax-free profit margins. Money put toward capital improvements can be "added" to a home's purchase price while closing costs "decrease" the sales price, essentially reducing the profit the homeowner gains in the eyes of Uncle Sam.