Real Estate Capital Gains
If you have decided to sell a house or are in the process of selling it, you need to keep in mind that usually, there are taxes on real estate capital gains. Generally speaking, the higher the price you sell, the bigger your tax bill from Uncle Sam. There are some ways to avoid these taxes. Let’s take a look at everything you need to know about capital gains tax when selling a house. By understanding the capital gains tax laws, you can potentially avoid these taxes and proceed in a relaxed manner with your sale
What is The Capital Gain Tax?
The IRS always requests a piece of any transaction and money you bring into your accounts. The profits acquired from real estate are taxable by law. This is how they calculate the amounts:
- They will assess the initial value of your property (what you paid for the real estate), which is called the basis. Then they will compare it to the price you received from the sale.
- The IRS also taxes capital gains acquired from investments, stocks, bonds, tangible assets, vehicles, and real estate.
What Can You Exclude From Taxation:
- If you are single, you don’t have to pay taxes for capital gain up to $250,000 from real estate.
- If you are married and calculate taxes mutually, you are exempted from amounts up to $500,000 from real estate.
Let’s look at a few examples. If you purchased a home some years ago for $100,000, and now you sold it for $450,000 while being single, your capital gain is $350,000. From this amount, $250,000 is not taxable. The remaining $100,000 in profit, however, would be taxable.
If you are married and bought a home for $500,000 and later sell the home for $800,000, there are no capital gains taxes due to only having a $300,000 profit. The $500,000 exclusion covers you from paying any taxes.
Real Estate Capital Gains
- Match losses. Investors can realize losses to offset and cancel their gains for a particular year. Savvy investors harvest capital losses as they occur and then use them on current and future taxes. For example, suppose you have a realized gain of $ 50,000 on a land deal. If you sell a rental property for a loss of $50,000, the two offset, and you pay no capital gains taxes. Up to $3,000 of excess losses not used to cancel gains can offset ordinary income. The remainder of the loss can be stored and carried forward indefinitely. Always seek tax and financial advice before making such moves.
- 1031 exchange. If you sell rental or investment property, you can avoid capital gains and depreciation recapture taxes by rolling the proceeds of your sale into a similar type of investment within 180 days. This like-kind exchange is called a 1031 exchange after the relevant section of the tax code.
If you have more questions, reach out to a 1031 facilitator, a trusted tax professional, or a real estate attorney, or someone you know and respect in real estate.
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