If you’re thinking about buying or selling real estate in the High Country, capital gains tax should be on your radar.
If you are selling a property, it will be an immediate concern, but even if you are purchasing you should be considering it as part of your strategy since you might sell the property again one day.
Here’s a summary of what capital gain taxes are, how they are calculated, and tips for avoiding them when you sell your property.
What are Capital Gains Taxes?
Capital gains taxes are levied against the sale of a handful of assets.
In the world of real estate, capital gains are calculated as the total sale price minus the original cost of the property.
You are paying taxes on the appreciation of the asset during the period of time in which you own it.
Capital gains taxes are due even on properties that are inherited, but there are some nuances.
How is it Calculated?
Capital gains are calculated differently from standard property tax assessments.
The assessed value is used to determine the difference between the original cost of the home and the appreciation value of the property. You often can find assessed value in a home appraisal report.
Calculating appreciation can be daunting. In theory, you would owe capital gains tax on the amount of appreciation calculated for the property.
If you don’t sell the property immediately, you can use the step-up basis for the tax.
This means that you would only be taxed on the difference in value since you owned the home and not since the original purchase was made by whoever you inherited the property from.
There are some differences for military families too, though they are complex and subject to change as the tax code evolves.
The standard timeline for capital gains taxes on real estate is five years, but since military families might have to relocate for various reasons, they can “pause” the clock and utilize a 15 year period instead.
Are There Different Tax Rates?
There are a handful of different tax rates for capital gains taxes on short-term gains.
If you have owned the home for less than one the tax rate for short-term gains ranges from 10% to 37%.
For long-term capital gains taxes, there are three brackets: 0%, 15%, and 20%.
Do You Have to Pay Capital Gains When Selling a Home?
You do not always have to pay capital gains tax when you sell a home.
There are different tax exemptions that the IRS uses to exclude taxes depending on the type of dwelling for sale.
If the property is a primary residence, and you have occupied it for two out of the past five years (this doesn’t have to be consecutive), you can qualify for an exemption of up to $250,000 for single filers and $500,000 for married couples.
If the property for sale is an investment property, you will not qualify for an exemption as it is not your primary residence.
Tips for Minimizing Capital Gains Tax
Some tips for avoiding or minimizing capital gains tax when selling real estate include:
- live in the house for at least two years
- keep receipts for home improvement projects
- Deduct your home office expense
- Sell when your income is lower
- Use a 1031 exchange to defer the taxes.
Navigating capital gains tax can be complex. First-time homebuyers need to be especially aware of looming tax bills pending after their first sale before they close on their home.
Be prepared! Our agents at 828 Real Estate can help you navigate the finances surrounding your home purchase.