Spring is officially here!! The rain is falling, the flowers are blooming and the taxes are due. Ugh. I know. If you sold your home this past year and made a profit (yay!), you need to be aware that you may actually have another tax to worry about. Capital Gains.
What is Capital Gains tax exactly? Well, let's explore this in further detail.
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What is Capital Gains Tax?
A capital gain occurs when you sell something for more than you paid for it. When it comes to real estate, this gain happens quite frequently. In fact, according to the IRS, pretty much everything you own can be considered a capital asset. Therefore, if you make money on the sell of it, then you could owe capital gains tax. For example, you purchase a home for $150000, then sell it for $200000 a year later. Depending on the state you live in and the circumstances regarding the home, the profit you made on the sale could be taxed.
How Do I Know if I have to Pay Capital Gains Tax?
According to the federal regulation, for sale or exchanges of real estate after May 6, 1997, the law allows an exclusion of gain on sale of personal residence. This exclusion is $250,000 filing single, or $500,000 if married and fililng jointly. In order for this gain to be considered a personal residence, then the taxpayer must have owned AND occupied the home as a PRINCIPAL residence for at least 2 of the 5 years before the sale. So, if your gain on the sale is at or below these exclusions, then you're in luck!
How to Calculate Capital Gains Tax
So, how do you determine what the capital gain on your home actually is? Well, basically it's simple math. Here's how:
1. Write down the selling price of your property.
2. Deduct ALL selling expenses. (Commissions to agents, legal fees, transfer taxes, etc.)
3. Determine the home's basis. ( The basis of a home you buy or build is its cost, plus any improvements made to the home while owned.)
4. Deduct your basis from the result of step 2. (Deduct any loan points you made as a seller).
5. Calculate depreciation ONLY if this property was used as an investment property. (rental, etc). (Click here to determine the depreciation for investment properties).
6. Deduct any depreciation and capital improvements (any permanent structural change or restoration to the property that enhances the property's overall value) made to the property from number in step 4.
7. If you qualify for exemptions, deduct these now. (ex. $250,000 or $500,000).
8. Multiply this remaining number (if any) by your tax rate. Your actual tax rate depends on your income. But, according to IRS.gov, the maximum net capital gain tax rate is 20 percent. However, for most taxpayers a zero or 15 percent rate will apply. A 25 or 28 percent tax rate can also apply to certain types of net capital gains.
If you need more information in regards to Capital Gains Tax, please visit the official IRS page for more help.
In Conclusion
Making a profit on a home is exciting for every homeowner. But, unfortunately, each seller has to be aware of potential taxes that are required to be paid on the profit from the sale of your home. Luckily, most homeowners will be exempt from paying capital gains taxes. So, for those lucky ones....enjoy that profit and good job!
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Emily Benner
Real Estate Expert
First United Realty
470.225.9097
