**Disclaimer: Though we work with clients and their accountants daily on real estate transactions and preferential tax treatment, we are not tax professionals, and this article is intended to be a general informational resource and foundation for discussion with your trusted tax professional.**
Capital gains taxes are owed on most assets and investments when you sell them for a profit or “gain.” These taxes apply to investments known as “capital assets,” which include stocks, bonds, and real estate. To focus on our real estate clients’ needs, we will refer to assets subject to capital gains tax as real estate. This is your guide to capital gains.
Key Takeaways
- Capital gains tax is owed when an investment is sold for a profit, calculated as the difference between the sale price and the property’s cost basis.
- The length of time an asset is held determines the tax rate; assets held for more than one year qualify for lower capital gains tax rates.
- Homeowners may exclude up to $250,000 in gains for single filers or $500,000 for married couples when selling a primary residence, provided eligibility requirements are met.
What Constitutes a “Gain”?
It is important to understand the definition of the term “gain.” In shorthand, the taxable gain amount equals net proceeds minus cost basis. The cost basis is the total investment into the property, including major capital improvements, while net proceeds represent the amount the seller receives after all closing costs have been paid.
When Are Capital Gains Taxes Due?
Capital gains taxes are not due until a property is sold, regardless of how long it is owned or how much it increases in value. Capital gains taxes should be a key element of your financial planning strategy.
Primary Residence Capital Gains Exemption
Real estate capital gains are taxed under a different standard if you’re selling your primary residence. According to the IRS, you may exclude up to $250,000 of capital gains from taxation if you are a single filer, and up to $500,000 if filing jointly, provided you have lived in the home as your primary residence for at least 2 of the last 5 years (non-consecutive years count). If you are selling a second home or an investment property, you will be responsible for the full capital gains tax.
How Much is Capital Gains Tax?
Capital gains tax depends on how long you owned the asset and your income level. Generally speaking, short-term capital gains (for assets held one year or less) are taxed at your regular income tax rate, while long-term capital gains are typically taxed at 0%, 15%, or 20% at the federal level. State taxes may also apply, depending on where you live.
Short-Term Capital Gains
Short-term capital gains tax applies to assets held for one year or less before sale, resulting in a gain. These gains are taxed as standard income under federal income tax rates. For most taxpayers, this results in a higher tax liability compared to long-term capital gains rates. Typically, the tax rate is 10% – 37%, depending on income.
Long-Term Capital Gains
Long-term capital gains taxes apply to properties owned for more than one year before being sold at a profit. These gains are taxed at the lower capital gains rates of 0%, 15%, or 20%, depending on income and filing status.
Reducing Capital Gains Tax Liability
The amount owed in capital gains taxes depends on deductions, income, the length of property ownership, and the sale price. There are several legal and tax strategies to help minimize capital gains taxes. Consulting a financial advisor or tax expert can provide guidance tailored to your specific situation.
Future Tax Considerations
There are potential changes to tax regulations that may impact capital gains tax rates, 1031 Tax-Deferred Exchanges, and deductions available to real estate investors. Proposed policies may include increasing the top capital gains tax rate, limiting 1031 exchanges for high-value transactions, and adjusting tax brackets based on income levels. While these proposals are still under discussion, staying informed and working with professionals will be crucial in adapting to any new tax laws and maximizing financial benefits. We will continue to monitor capital gains tax developments closely and provide updates as they unfold.
For additional information about how Capital Gains Taxes are calculated, please consult with your tax professional or financial advisor and review the IRS site.
Bottom Line
In the end, there is always an opportunity to better leverage your capital. As it pertains to real estate, Altamont Property Group can gladly help you connect to investors and property owners alike to help plan for the best financial outcomes for their real estate decisions.
Capital Gains Tax FAQ
Can capital losses reduce capital gains tax?
Yes. Capital losses can be used to offset capital gains, which may reduce your overall tax liability. Please note that any loss from the sale of personal-use property, such as your car or home, is not tax-deductible.
Are there any exemptions or exclusions for capital gains tax?
Yes. For example, homeowners may qualify for a capital gains exclusion when selling a primary residence, and certain retirement accounts allow investments to grow tax-deferred or tax-free.
How is capital gains tax calculated?
Capital gains are calculated by subtracting your cost basis (purchase price plus eligible expenses) from the sale price of the asset. The resulting profit is the amount potentially subject to tax.
Sources
https://www.fool.com/investing/2021-capital-gains-tax-rates-and-how-to-minimize-t/ –https://www.investopedia.com/terms/c/capital_gains_tax.asp
https://www.rocketmortgage.com/learn/capital-gains-home-sale
https://altamontpropertygroup.com/investment/bidens-real-estate-tax-plan-proposal/
https://altamontpropertygroup.com/investment/real-estate-101-overview-of-1031-tax-deferred-exchanges/
