If you sold your home or property this year, you may be subject to Capital Gains taxes. Capital Gains occur when you sell something that has increased in value, such as an investment. If you have had the property for over a year, you could be looking at a long-term capital gain anywhere from 0%-20%. If you have questions about Capital Gain taxes, consult a professional such as Tax Associates in Bronx, NY to explain your specific situation.
There are a few circumstances which can cause an increase in the value of your property, and therefore cause it to be considered a capital gain. If there is a sudden increase in the value of properties in your area, this could cause the value of your property to subsequently rise. In addition, if you have had your home for a long time, the value will naturally rise. Significant improvements also impact the overall value of your home. Such improvements can be added to the cost of your home. However, repairs are not improvements and cannot be added. Your tax professional will help you decipher the difference between repairs and improvements as determined by IRS Pub. 523.
When determining the initial cost of your home, or the “cost basis”, you should consider what you paid for the home, and major improvements. It is important to keep track of all major improvements you make on a yearly basis, so that you are able to calculate these through time. If you have a home office, and have claimed this each year on your taxes, you will have to subtract this amount from the cost basis.
Your cost basis is subtracted from the price you sell your home for, and this calculates your capital gain, which is taxable. Generally, you are taxed 15% on your capital gain. However, as previously mentioned, the tax can range anywhere from 0 – 20%.
There are several ways you can also reduce your capital gain, therefore reducing the taxes you must pay on the Capital Gain. These are called exclusions, and are subtracted from the profit. If the home is your primary residence, you’ve owned it for at least two years, lived in the home for two years within the five years preceding the sale, and have not excluded a capital gain from a home sale in the last two years, you can qualify for $250,000-$500,000 exclusion on your profit, depending on your filing status.
Many people have more than one home. The exclusion can only apply to your main home. There are many factors that can determine whether your property is your main home, but here are some main “tests” recommended by the IRS:
You will automatically disqualify for full exclusions if you received the property in a like-kind exchange, or are subject to expatriate tax. You should be already aware if these circumstances apply to you, but if you are unsure, contact one of the tax professionals in your state, such as Tax Associates in Bronx, NY, to make sure.
Partial exclusion is also possible, in certain circumstances. Tax Associates can help you pinpoint and utilize these exclusions, but there are a few main exclusions you should be familiar with. For example, if you had to move because of work, you could qualify for a partial exclusion. You must have been transferred over 50 miles further from work than your current home resides, began a new job over 50 miles farther than your home is located in relation to the job, or your spouse or a co-owner of the home was subject to the previous two circumstances.
There are also cases where health-related moves can entitle you to partial exclusions. If you moved to obtain or help achieve diagnosis, treatment, or cure for a health issue, you could qualify for partial exclusion. This must be something you could not have determined would be a possibility when purchasing the home. If you are also unable to live in the home anymore for health reasons, you may qualify.
If you transfer your home to a spouse or ex-spouse as part of a divorce settlement, you are not subject to any capital gains or losses, and do not need to pay taxes on the transfer, regardless in any changes in value.
Capital Gains taxes on Real Estate can certainly affect your financial outlook when filing your taxes. There are several different ways you may be able to reduce or eliminate this tax, if you are familiar with all of the available exclusions. Make sure you contact a professional by clicking the link below to start asking your questions right away.
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