Perhaps one of the biggest misconceptions about the capital gains taxes on real estate is that the passing of the Tax Cuts and Jobs Act in late 2017 means that major changes are coming. But that is not the case as these new tax reforms provide very little impact on how you will be expected to file for 2018.
New legislation aside, there are a handful of other common misconceptions that taxpayers still cling to as they prepare their returns to report capital gains on property sales. If you're among the many individuals who remain unsure as to how you are supposed to file, find a tax preparer who can set the record straight.
The Amount of Gains
How much you make on a real estate sale can have an effect on whether or not you will owe any capital gains taxes on the sale of a property in the first place. The tax code provides taxpayers with a wide range of deductions and credit options to help lower liability.
Under the Taxpayer Relief Act of 1997, anyone who sold real estate at a significant profit of up to $250,000 for single filers and $500,000 for married filers, could exempt those earnings from being taxed. Your tax preparer will ask you how much you made on any real estate sale over the course of the filing year in order to correctly report those earnings and determine what you may owe, if anything, in taxes on the sale.
Primary Residence
One of the more common misconceptions that snares otherwise well-intentioned taxpayers is the difference between selling a home in which you lived for an extended period of time versus a home that you "flipped".
Where the taxes on your gains are concerned, you will benefit far more greatly with tax breaks on the sale of a property that could be considered a primary residence. To qualify, you must have resided in that home for two out of five years during the time that you owned the property.
House flippers are not entitled to participate in the various tax advantages offered to homeowners since the money earned on that transaction is considered taxable income instead of capital assets. Therefore, that profit will be taxed at the applicable bracket.
If you're among this group of home buyers who flip homes to sell, be sure you conduct excellent book-keeping practices so that you can file correctly and hold corresponding documentation in the event of an audit.
Gain vs. Equity
Any smart tax preparer can tell you that there is a major difference between the gain you earn on a sale and the equity contained within that particular property. Knowing how each affects your taxes is crucial for remaining compliant with tax law.
Equity is the money in the property once any mortgage is satisfied in full. Gains remain the same on any sale whether or not you own that real estate entirely or still owe money to your bank or other financing entity.
Find a Tax Preparer to Avoid Errors
Many taxpayers confuse gains and equity with one another and the result is mistaken tax returns that are often filed without the help of a smart accountant. Since capital gains are calculated after you subtract your net sale price, it's important to find a tax preparer that can work with you especially if you've taken large amount of equity from the home before you sell.
This sometimes leads to a taxpayer left wondering how he or she will pay what they owe Uncle Sam when tax season comes around.
Married Couples and Tax Breaks
As mentioned previously, married couples may claim up to $500,000 tax exemption on the profit gained from each home sold, given that it falls under the requirements for a primary residence.
But there are also other stipulations. A couple must have both lived in any residence upon which they wish to enjoy tax advantages for that two year period before they attempt a sale, regardless if only one spouse was listed on the title.
In addition, should one of the spouses enjoy an exemption under the TRA, the couple will need to wait until they complete that two year period in order to shield their capital gains from taxes on the sale of that home.
That's why it pays to practice diligent book-keeping before you get married, it can make your life with a spouse easier when it's time to file your taxes.
