Hello everyone! Las Vegas, NV’s Book 2 Tax is here to answer some of your questions about the upcoming tax season. One of the most common questions that we receive when our clients are looking for a Tax Preparer is just what will happen to their home after selling it. In other words, they’re wondering about an intricate topic that our Accountants are experienced with: capital gains tax rates on real estate.
If you’re wondering what this is, you’re not alone. Capital gains and the many intricate rules and conditions are what usually motivate someone to Find a Tax Preparer. We’ll be taking a look at a general working knowledge of capital gains and the rules that will apply when considering your real estate. At the end of this article, if you’re looking for more information on how to file your taxes more effectively, there will be links to follow.
Just about everything we own, whether it is for personal use or for investment purposes, is a capital asset. While some may think their luxury vehicles, stocks, or bonds fit into this category neatly, real estate you own and your home are classified under this distinction, as well. When selling a capital asset, the difference between how much you purchased it for versus the sale prices generally determines whether it was a capital gain or a capital loss.Concerning tax rates, your losses are typically not tax-deductible. However, your capital gains are (more on that later).
There are two distinctions between how capital gains (and losses) are categorized by the IRS: long-term or short-term. The determining factor is whether you held onto the asset you later sold for more than one year or more. If so, that capital gain is considered long-term. If not, the capital gain is considered short-term. Furthermore, to determine how long you held on to the asset, begin counting from the day after the day that you acquired the asset, then count the day that you sold the asset. This determines how the IRS classifies capital gains. Simple enough, right?
Once you’ve determined the classification, then determine something called “net capital gain,” which is just how much you bought the asset for subtracted from how much you sold it for. (Note: If you inherited the asset, the asset is subject to a few more rules that are beyond the scope of this article.)
Still with us? Okay. Taxes on short-term and long-term capital gains do differ greatly. If you have a short-term net capital gain, your capital gains are considered part of your normal income and are taxed accordingly. However, if you have long-term net capital gains, your tax rates vary significantly. The tax rate for most people on their net capital gain is no higher than 15 percent. Some or all of your net capital gain may be taxed even lower if you are in the 10 – 15 percent ordinary income tax brackets—you may not even be responsible for 0% tax.
There is a catch, however. If a taxpayer’s taxable income does exceed the threshold set for the 39.6 percent ordinary tax rate, then a 20% tax rate does apply. A quick rundown of the 39.6 percent ordinary tax rates income are:
Okay, let’s dig in a bit. If you do experience a net loss after the sale of your asset, you are entitled to $3,000/year to reduce your taxable income, with the ability to carry over any additional losses exceeding $3,000 ($1,500 for married filing separately) into future years. This can offset either your future capital gains or another $3,000 in ordinary income, ultimately putting more money into your pocket.
Of course, this is cannot be a full explanation and perhaps this is where some of the number crunching might motivate you to Find a Tax Professional for minimizing Capital Gains Tax Rate on Real Estate.
When selling your primary residence, you have the ability to make up to $250,000 in profit if you're a single owner, twice that if you're married, and be exempt from any capital gains taxes.
There are conditions that apply, however. First, the property you're selling must be your principal residence, meaning that you live in it. A house or other property that you have solely for investment purposes doesn’t not count. For those cases, the usual capital gains rules apply.
The second caveat is that you also must live in that principal residence for two years within a five year period before selling it. This is known as the use test. It also means, practically speaking, each sale must be at least two years apart.
If you’re looking to do this several times in your lifetime, this still leaves room to make money on several properties. You can sell your residence this year, pocketing the gains within tax limits, and then purchase a new residence. Two years later, you can do the same thing, ad finitum.
These breaks seem tremendous, but there’s got to be another catch, right? Correct. For those that own multiple homes, you will not be able given the same exemptions for houses that pass the use test. Despite converting another piece of real estate to your primary home, you will still owe tax on part of the sale money. This is based on how long the house was used as a second, rather than your main, residence.
Special rules do apply for married couples. Either spouse can meet the ownership test, but they both must live in the residence for two years. This becomes tricky for newlywed couples, but if both were living in the house for the requisite two years BEFORE getting married, they then pass the test for taxes.
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