So you want to sell your property. But are you aware of all the tax liabilities related to real estate? There are numerous tax considerations for the people who own a house. One of them is capital gains.
What is Capital Gain?
The increase in the value of an asset is known as capital gain. Typically, the gains in the capital value are taxable. However, the tax rates may vary, depending upon the income and tax filing status of the taxpayer.
For real estate, taxes are calculated afresh for each fiscal year, and are usually paid throughout the life cycle of the property. Or, at least, till the time it is sold to a new owner.
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Let us elaborate on how the tax works in case of a home sale.
The tax rate in capital gains – The tax rates for capital gains in real estate usually depend on two factors – first, the class of capital gain, and second the income and filing status.
The class of capital gains is defined by the type of asset and the term of the gains. In general, a property that is owned for less than a year would bring in short-term capital gains. Whereas, anything more than a year is usually known as long-term capital gain. That being said, the tax rates for short term capital gains are lower as compared to long term capital gains.
Many long-term gains are taxable at the rates of up to 20%, but there are instances where higher rates can also apply. These assets include collectibles like coins, antiques (28%), or unrecaptured gain under section 1250 for real property (25%).
Now, would you like to know ways to reduce the tax liability on these long-term profits? Keep reading.
Selling a primary residence – The primary residence is the property in which you live for at least 2 years. It need not be consecutive for two years. Additionally, it is not necessary that you own your home. For instance, if you live in your house for two years and own it for three years, it will be called a primary residence. In such cases, you might not need to pay the tax when you sell your property. Also, if you have recently claimed an exemption in the period of the last two years, you can’t claim another one. Meeting these criteria helps in excluding the tax when you sell your home. As per this blog https://bogartwealth.com/what-is-unearned-income/ you can always talk to the experts about managing this aspect of the unearned income. This may serve you as the source of income in addition to the earned income.
Selling an investment property – If you own an investment property that is not exempted from the capital tax, sell your house strategically. Keep a check on how much money you have earned. In this way, you can be sure of what is the best time to sell it. For instance – You and your partner earn 90,000 US dollars every year. One of you stops working, and this income reduces to 70,000 US dollars. Ideally, it is the best time to sell your property as it puts you in the 0% bracket. It puts an end to your liability, presuming that your home is eligible for long-term capital gains tax policy.
The amount of tax depends upon your income and suitable deductions. One such consideration is the capital gain tax that you can have in the homeownership. Do not forget that the financial condition of every individual is different. So never hesitate to speak with the licensed financial advisor before finalizing any financial decision.