Capital gains tax, the tax on the profit made from a sale, can take a large chunk out of your profits, if you're not careful. For many people, particularly those who have made significant improvements on a piece of real estate or have seen their area grow in value, capital gains tax can be a major concern and eat a great deal of their profits.
An example of capital gains tax would be for a home you bought for $100,000 and sold for $700,000. The $600,000 profit is capital gains. Some or all of it is taxable, depending on how you handled your home while you owned it.
There is a capital gains credit available for homeowners. It's $250,000 for a single filer and $500,000 for a couple who are married, filing jointly.
There are rules that can trigger capital gains tax:
- If you didn't live in the house for at least 2 years of the time you owned.
- If it wasn't your primary residence.
- If you owned it less than two years before you sold it.
- If you claimed the exclusion in the two years before the sale of this home.
- If you used a 1031 exchange to purchase the home in last five years.
- If you're subject to the expatriate tax.
If you owned the house for less than a year, the sale can subject to short-term capital gains tax rate, which is even higher. Otherwise, the capital gains tax is 15% to 20%.
In the example above, if you're married, filing jointly, you can take the $500,000 exclusion. That would mean you would only pay capital gains tax on $100,000, if you've met the other criteria.
Knowing these rules going into the purchase of a home can make it much easier to save money later. Plan to live in the house for at least 2 years. Plan to hold on to it for at least two years. It's not hard for the average homeowner to avoid the capital gains tax, but for investors and flippers, it can mean a significant chuck out of their profits.
King Realty Group does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.