Capital Gains Taxes For Real EstateHow do real estate capital gains taxes work?
Market Value Increases Lead to Real Estate Capital Gains
The constant seller's market has led to a dramatic increase in home prices over the last few years. While an increase in equity is wonderful, it has the potential to leave you with a much larger tax bill. When selling a house it is essential to understand capital gains tax law. Capital gains on real estate are paid based on the profit from the sale.
The real estate capital gains tax law allows you to off set the profit on your home with any expenditures you may have. By keeping tabs of your expenses you can bring down your tax basis. For example, let's say you purchased a home for $300,000 and it has increased in value to $400,000. If you had no expenses during the time of ownership, you would be potentially open to paying taxes on your $100,000 profit.
Fortunately, you are able to count expenses. So, for example if you added central air to the home to the tune of $15,000, your tax basis would come down to $85,000. In other words, you can deduct what you spent on improvements to lower your taxes. Another common expense you can deduct when it comes time to sell is the commissions you pay to a real estate company. This expense can also reduce your tax liability.
The amount of capital gains you pay will boil down to a few things, including when you sell the home and what tax bracket you fall into. The time frame for selling will determine whether it is a short term capital gain or a long term capital gain. Short term capital gains are much more expensive. The government will take a significant share of your profits when you sell a home quickly.
Short term capital gains are defined by those in which an asset is held less than a year. A long term capital gain is over a year. When selling a house as a short term capital gain, you will be taxed at the tax bracket you fall into.
The longer term capital gains tax rate will be determined by your tax filing status and the income bracket you fall into. The good news about the real estate capital gains tax law is there is a significant deduction available.
The deduction works as follows:
When you are a single person, you can exclude up to $250,000 in profits from your house sale before paying any taxes. When you are a married couple, you can exclude up t0 $500,000 in profits from your home sale before having to pay any tax.
There are some additional qualifications that will need to be met including the home being your primary residence. You will also need to have lived in the property for two out of the last five years to qualify for the deduction.
It should be understood that there are always nuances to tax laws and everyone's personal situation is different. It is always advisable to speak to a tax professional when it comes to tax filings.
The reference at Maximum Real Estate Exposure covers the real estate capital gains law in-depth. It will be worth checking out for further clarification on the law. Take a look and if you find the information helpful, share it with others.