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Capital Gains
A capital gain occurs when you sell an asset for more than you purchased it for. For example, if you profit on the sale of your home, you likely have a capital gain. Capital gains are taxable by the IRS. You do not pay tax on a capital gain until the sale of your home or property. The amount you pay in taxes for a capital gain depends on several factors including how long you’ve owned your home, your tax filing status and income.
Long-term vs. Short-term Capital Gain
If you sell your home within one year of purchasing it, then it’s considered a short-term gain. The tax rate for short-term gains is determined by your ordinary income bracket.
Homes that are sold more than a year after purchase are long-term gains. The tax rate for long-term gains is determined by income and filing status:
Capital Gains Tax Exemptions
The IRS allows for capital gains tax exemptions when specific requirements are met:
If you don’t meet all the requirements, you could still qualify for a partial tax exemption. Contact your tax advisor for more information.
1031 Exchange
Real estate investors use a 1031 exchange to defer capital gains tax. In a 1031 exchange, investors “exchange” one property for another by selling a home and placing its proceeds directly into another investment property. In order for a 1031 exchange to occur, the purchased home must be an investment property and be more valuable than the home sold. There are strict guidelines in place, which if not met, could result in a hefty tax bill. Proceeds from the home sale are held in escrow until the new investment property closes. Investors have 45 days to identify the investment property they want to purchase, and 180 days to close on it.
Capital gains tax rates can vary by state. FitzGerald Financial Group is not a tax consultant. Contact your tax advisor.
Long-term vs. Short-term Capital Gain
If you sell your home within one year of purchasing it, then it’s considered a short-term gain. The tax rate for short-term gains is determined by your ordinary income bracket.
Homes that are sold more than a year after purchase are long-term gains. The tax rate for long-term gains is determined by income and filing status:
- A 0% tax rate applies if your taxable income is less than or equal to:
- $41,675 for single and married filing separately,
- $83,350 for married filing jointly or qualifying surviving spouse,
- Or, $55,800 for head of household.
- A 15% tax rate applies if your taxable income is between:
- $41,676 - $459,750 for single,
- $83,351 - $517,200 for married filing jointly or qualifying surviving spouse,
- $55,801 - $488,500 for head of household,
- Or, $41,676 - $258,600 for married filing separately.
- A 20% tax rate applies when taxable income exceeds limits set for the 15% capital gain rate.
Capital Gains Tax Exemptions
The IRS allows for capital gains tax exemptions when specific requirements are met:
- The home is your primary residence,
- You’ve owned it for at least two years,
- You’ve lived in it for at least two of the past five years (some exclusions apply),
- And you have not taken this exclusion in the past two years.
- Up to $250,000 for single individuals and
- Up to $500,000 for married couples filing jointly.
If you don’t meet all the requirements, you could still qualify for a partial tax exemption. Contact your tax advisor for more information.
1031 Exchange
Real estate investors use a 1031 exchange to defer capital gains tax. In a 1031 exchange, investors “exchange” one property for another by selling a home and placing its proceeds directly into another investment property. In order for a 1031 exchange to occur, the purchased home must be an investment property and be more valuable than the home sold. There are strict guidelines in place, which if not met, could result in a hefty tax bill. Proceeds from the home sale are held in escrow until the new investment property closes. Investors have 45 days to identify the investment property they want to purchase, and 180 days to close on it.
Capital gains tax rates can vary by state. FitzGerald Financial Group is not a tax consultant. Contact your tax advisor.