So you’ve realized a profit on your investments? Buckle up and get ready to report your transactions to the Internal Revenue Service (IRS) on Schedule D and see how much tax you owe.
But it’s not all bad news. If you lost money, this form helps you use those losses to offset any gains or a portion of your ordinary income, reducing the taxes you owe. And if you profited from your transactions, Schedule D helps ensure you don’t overpay Uncle Sam for your gains.
What is a Schedule D?
Schedule D is an IRS tax form that reports your realized gains and losses from capital assets, that is, investments and other business interests. It includes relevant information such as the total purchase price of assets, the total price those assets were sold for and whether those assets were held for the long term (more than a year) or short term (less than a year).
Who has to file a Schedule D?
You’ll have to file a Schedule D form if you realized any capital gains or losses from your investments in taxable accounts. That is, if you sold an asset in a taxable account, you’ll need to file. Investments include stocks, ETFs, mutual funds, bonds, options, real estate, futures, cryptocurrency and more. Those who have capital losses that they’re carrying over from previous tax years will want to file Schedule D so that they can take advantage of the tax benefit.
Others will need to file Schedule D as well. Those who have realized capital gains or losses from a partnership, estate, trust or S corporation will need to report those to the IRS on this form. Those with gains or losses not reported on another form can report them on Schedule D, as can filers with nonbusiness bad debts. Those with like-kind exchanges and installment sales may need to answer questions about their transactions on Schedule D.
How you report a gain or loss and how you’re taxed
The two-page Schedule D, with all its sections, columns and special computations, looks daunting and it certainly can be.
To start you must report any transactions first on Form 8949 and then transfer the info to Schedule D. On Form 8949 you’ll note when you bought the asset and when you sold it, as well as what it cost and what you sold it for. Your purchase and sales dates are critical because how long you hold the property determines its tax rate.
If you owned the asset for a year or less, any gain would typically cost you more in taxes. These short-term sales are taxed at the same rate as your regular income, which could be as high as 37 percent on your 2023 tax return. Short-term sales are reported in Part 1 of the form.
However, if you held the property for more than a year, it’s considered a long-term asset and is eligible for a lower capital gains tax rate — 0 percent, 15 percent or 20 percent, depending upon your income level. Sales of long-term assets are reported in Part 2 of the form, which looks nearly identical to Part 1 above.
Detail your transactions
Once you determine whether your gain or loss is short-term or long-term, it’s time to enter the transaction specifics in the appropriate section of Form 8949. All transactions require the same information, entered in either Part 1 (short term) or Part 2 (long term), in the appropriate alphabetically designated column. For most transactions, you’ll complete:
(a) The name or description of the asset you sold
(b) When you acquired it
(c) When you sold it
(d) What price you sold it for
(e) The asset’s cost or other basis
(h) The gain or loss
Total your entries on Form 8949 and then transfer the information to the appropriate short-term or long-term sections of Schedule D. On that tax schedule you’ll subtract your basis from the sales price to arrive at your total capital gain or loss, as in the sample below.
Schedule D also asks for information on some specific transactions that do not apply to all taxpayers, such as installment sales, like-kind exchanges, commodity straddles, sales of business property and gains or losses reported to you on Schedule K-1.
Check out the complete list and if any of these apply to your tax situation, it probably would be wise to turn Schedule D and the rest of your tax paperwork over to a professional. These are complicated matters, and it can be easy to make a mistake even with the best intentions.
Schedule D also requires information on any capital loss carry-over you have from earlier tax years on line 14, as well as the amount of capital gains distributions you earned on your investments.
You may be able to avoid filing Schedule D, if one of the two situations below applies to your return:
- If distributions, line 13, are your only investment items to report, you don’t have to fill out Schedule D; they go directly on your 1040 or 1040A return.
- You also can escape Schedule D if your only capital gain is from the sale of your residence. As long as you meet some basic residency requirements and your home-sale profit is $250,000 or less ($500,000 for married-filing-jointly home sellers), it’s not taxable and you don’t have to tell the IRS about it here or on any other form.
Total your transactions
Once you’ve filled in all the short-term and long-term transaction information in Parts 1 and 2, it’s time to turn over Schedule D and combine your asset-sale details in Part 3. This section essentially consolidates the work you did earlier, but it’s not as easy as simply transferring numbers from the front of the schedule to the back.
Lines 16 through 22 direct you to other lines and forms depending on whether your calculations result in an overall gain or loss. A couple of lines in Part 3 also deal with special rates for collectibles and depreciated real estate. Again, in these situations, expert tax advice might be warranted.
Use Schedule D to total up your gains and losses. If you total up a net capital loss, it’s not good investing news, but it is good tax news. Your loss can offset your regular income, reducing the taxes you owe – up to a net $3,000 loss limit.
If you reported a net loss greater than the annual limit, it can be carried forward to use against gains in future tax years until it’s exhausted.
As a bonus, your capital loss means you’re through with Schedule D. You simply transfer your loss amount to your 1040 and continue your filing work there.
Figure the tax on your gains
When you come up with a gain, the tax paperwork continues. And this is where the math really begins, especially if you’re doing your taxes by hand instead of using software.
Depending on your answers to the various Schedule D questions, you’re directed to the separate Qualified Dividends and Capital Gain Tax worksheet or the Schedule D Tax worksheet, which are found in the Form 1040 instructions booklet. These worksheets take you through calculations of your various types of income and figure the appropriate taxation level for each.
Before you begin either of these worksheets, be sure you’ve completed your Form 1040 through line 11 (that’s your taxable income amount), because that’s the starting point of both worksheets. From there you’ll have lots of addition, subtraction, multiplication and transferring of numbers from various forms.
But if you sold stock or other property, don’t be tempted to ignore Form 8949, Schedule D, the associated tax worksheets and all the extra calculations. Remember, the IRS received a copy of any tax statement your broker sent you, so the agency is expecting you to detail the sale, and gain or loss, with your tax filing.
Bottom line
The extra work needed in figuring your capital gains taxes is generally to your advantage. Regular income tax rates can be more than twice what’s levied on some long-term capital gains. So when you’re finally through with the calculations, your tax bill should be lower than it would have been if you had simply used the standard tax table to find your tax due.
Note: Kay Bell contributed to a previous version of this story.
Key takeaways
- Real estate comps, short for comparables, are a way to gauge how much a property is worth by comparing it to other, similar properties.
- The more characteristics your home shares with the comps, the more accurate they are likely to be.
- Real estate agents and home appraisers use comps, among other things, to determine home values.
In real estate, comparables — known as comps for short — are one of the most important tools used to determine how much a home is worth. Whether you’re trying to price your home for sale, buy a new one or just gauge how much home equity you’ve accumulated, here’s a rundown of everything you need to know about comps for your house, and how to find them.
What are real estate comps?
Real estate comps provide you with a set of properties that share similar characteristics to your own, making them ideal for price comparison. Typically, comps also come from the same area and the same, recent time period. For example, if you’re trying to sell a two-bedroom, one-bathroom house, your comps would include other two-bed, one-bath houses in your neighborhood that have sold over the past several months. They might also include properties that are currently on the market.
Comps are important for the valuable context they provide. “Real estate comps are imperative to fully understand the state of today’s real estate market,” says John Ameralis, an associate broker at Compass in New York City. “They include active, in-contract and recently sold properties in the trailing six months.” Assessing them can help you arrive at the fair market value for a house you’re either trying to sell or considering purchasing.
Some of the key factors that are generally considered when identifying comps include:
- Location
- Square footage
- Number of bedrooms and bathrooms
- Condition
- Property style and age
- Home improvements, renovations or amenities
Comps are not foolproof
An important caveat on real estate comps: Unless you’re looking at a row of exactly uniform properties (think brand-new, adjacent townhouses), there are always going to be slight differences. “Every property is unique in its way,” says Ameralis. “So, although you can find closely comparable properties, none will be identical.”
How to find real estate comps
All it takes to find appropriate real estate comps is a little bit of research. Here’s how to go about it in four easy steps:
1. Understand your home’s specs
To find appropriate comps for a house — whether it’s one you want to sell or want to buy — your first step is to get clear on the property. Make a list of all the details that define it, such as where it’s located, its size, how much land it sits on, the number of bedrooms and bathrooms it has, whether it is part of a homeowners association and any special amenities or upgrades (such as skylights, a high-end chef’s kitchen or a swimming pool).
To drill down even further, identify other factors that could also impact the home’s value, such as the school district it’s in or its proximity to public transit, shopping and parks.
2. Search for similar, recently sold homes
The next step is to look for recently sold or pending properties with similar characteristics. If you’re working with a real estate agent, he or she might consult the local MLS (multiple listing service) to give you a rundown. If you’re starting out on your own, sites like Zillow and Redfin can give you a sense of the local market.
When conducting online searches, it’s important to filter for sold homes, not simply listed ones: Listings only show the asking or list price, not the price a property actually sold for. In addition, set your search to the same neighborhood and to similarly sized homes, as well as the same type of property you’re comparing. In the case of a condo, for example, search only for other condominiums. A wider search that incudes single-family homes will give you misleading information. Pay close attention to other amenities, too, such as whether parking is included.
Ameralis recommends looking for properties that have sold within the last six months. If the housing market in your area has been slow, you may have to look beyond the six-month mark — but that’s not likely in most places these days.
3. Narrow down your list
Once you’ve identified comparable candidates, inspect them more carefully to find the ones that are most similar to yours. Ameralis suggests compiling a list of four to six comps in order to appropriately evaluate your property.
If you live in a very active housing market, you may want to get ultra-specific about your criteria. For example, two homes with similar square footage and finishes, within a quarter mile of each other in the same school district, both with in-ground pools, are likely to have very similar values. Conversely, if the home you’re evaluating is unique, unlike what has sold nearby or in a very sparsely populated area, you may need to relax your search criteria.
Remember, there’s only so much information you can gather online, so it’s important to get the whole picture. Some properties might look like a near-perfect match on a screen, but in reality, they could have key differences that impact their value. One home might be on a cul-de-sac with stellar curb appeal, for example, while another has ever-present noise from a nearby highway. If possible, visit the properties in-person, or reach out to the agents who sold them to get additional details that may not be obvious in an online search.
4. Do the math
Once you’ve settled on your four to six comps, simply compare the sale prices of each to get a rough idea of the home’s fair market value.
Or, try crunching some numbers to get another perspective. For instance, you can look at the square footage of each comp and divide its sale price by its number of square feet. This will indicate the home’s price per square foot, or PPSF, a frequently used metric in real estate. You can then take the average PPSF of all the comps on your list, and using that dollar value, multiply it by the number of square feet in your home.
For example, say you pulled four comps with PPSFs of $200, $217, $222 and $233. The average of those figures is $218. If you multiply $218 by the square footage of the home in question — for instance, 2,100 square feet — the home’s value based on comparable PPSF might be around $457,800. With this calculation, you now have a ballpark estimate of what the home may be worth.
Who uses real estate comps?
Comps aren’t just a tool for home sellers and buyers. Many real estate experts utilize them, too. If you’re working with a Realtor, for example, he or she will use a set of comps to analyze properties in your price range — this helps listing agents set a competitive list price, and buyers’ agents know how much to offer when bidding.
Banks and professional appraisers also use comps. If a home purchase is being financed, the lender will require a home appraisal to confirm how much the home is worth. Appraisers use comps to inform their assessment of a property’s market value, though they take a great many other factors into account as well, including the city or county’s valuation for tax purposes, the site, hazards, HOA dues, improvements and overall condition.
Next steps
Comps can help you accurately price a home you’re selling or ensure you’re not overpaying for one you’re buying. They’re a useful tool to get a feel for a home’s value, but they’re not completely foolproof — so don’t skip on working with a knowledgable local real estate agent. Many agents offer a complimentary analysis, called a comparative market analysis or CMA, so you won’t have to pay out-of-pocket to get expert insight. A good agent can not only help you get an accurate estimate of a home’s value, but can also help you navigate what can be a confusing, paperwork-heavy real estate process.
FAQs
-
Real estate agents can perform a sophisticated comparative market analysis to identify comps very precisely. But you can also find general comps yourself by looking online for recent sales in your neighborhood, finding the homes most similar to yours, and checking prices to see how much they sold for.
-
Yes, typically, but they’re only one piece of the puzzle. Real estate comps can provide a ballpark idea of a home’s value based on similar recently sold homes in the area. But home appraisers also take many other factors into account when assessing appraised values, as do real estate agents when determining appropriate list prices.
-
You want enough to give you a good sampling, because some cases might be outliers — for example, a home that is very close to yours and has the same number of bedrooms and bathrooms, but is in particularly poor condition. Generally, between four and six will do the trick, according to Compass broker John Ameralis.