Your capital gains on sale of home calculation is one of the most important that you will make after the sale of the home. In order to keep the government off of your back while you are enjoying the fruits of your sale, you need to understand the capital gains tax fully and what you need to do to pay it. Here are the basics about your capital gains tax budget.
How are capital gains assessed?
The length of time that you own a property, the amount of profit you gain from its sale, and your own legal filing status are the three main contentions for determining how much you owe in capital gains tax. If you want to become familiar with the basic rules that govern this assessment, read IRS Publication 523.
How do I qualify for the maximum exclusion from capital gains tax?
If you want to reduce your capital gains tax by the largest amount, then you must fulfill the following three conditions: First, the home that you are selling must have been your primary residence for at least two of the past five years; second, the property was not acquired under the auspices of a 1031 exchange sale; and third, you have not claimed any other exclusion within two years of the date of sale.
Assuming that all of the above conditions are true, then your filing status will determine the amount of money that you can exclude from the sale. $250,000 is all yours if you are single, and you can keep $500,000 from Uncle Sam if you are married, filing jointly.
Keep in mind that a tax exclusion is completely different from a tax benefit: Fulfilling the above criteria lowers your taxable income on the house by $250,000/$500,000; it does not give you a lower interest rate or additional benefit on any money that you make beyond this profit margin.
Does my other income affect my capital gains tax?
If you have an adjusted gross income that is above $200,000 as a single person or $250,000 as a married couple, you are considered a high income earner for the sake of capital gains taxes on your real estate sales. This means you will be responsible for an additional 3.8 percent tax that you must take into consideration during your calculations.
What is my cost basis?
Creating an appropriate cost basis will determine the correct amount of money that you should budget for your real estate sale. Many people completely botch this calculation and overpay their capital gains, and some of the unluckiest sellers never actually figure out that they overpaid.
Your cost basis is the starting home value from which you calculate your profit from sale. Read over the Figuring Gain or Loss Section in Publication 523, and go over your cost basis with a certified real estate accountant before reporting to the IRS. There are many rules that affect how you calculate this number, and this number affects all of the others that you will be dealing with. Rest assured that the hundreds of dollars that you spend on an accountant’s bill will pay for itself in spades upon finding the right cost basis to report to the government.
How much should I budget for my capital gains tax?
The simple equation for determining capital gains tax starts with the home sale price minus your selling expenses. This is your total amount realized. Subtract your adjusted basis, and you have the amount of taxable income that you need to consider. You should then apply all of the tax benefits and exclusions that you are eligible for, both those mentioned above and those that you find in consultation with your professional aides. Determine your tax bracket, and pay the appropriate amount. Keep in mind that you may have other options for deferring this payment depending on how you purchase new properties. Consult with an accountant if you plan on investing in other properties after selling.
What if I am buying a new property?
The 1031 exchange sale is the procedure by which many people save money in capital gains taxes by transferring the profit into a new property. If the new property is a like-kind purchase that is made within a certain time frame of selling the old one, you may be able to completely forego capital gains taxes for the time being while making money on the assets. This strategy is used by many developers to keep from paying out large sums to the government while investing in property.
What is my next move?
Because the way in which capital gains is calculated is so flexible, you must find a real estate accountant and lawyer who understand the rules of engagbent with the IRS, the personal advantages that you have, and the different ways in which you can manipulate the many rules of the IRS tax code. You can certainly perform back of the napkin calculations using free online resources in order to stay in the discussion. However, you should never think that any free online resource can give you the sophistication of a trained professional who is up to date on the latest rules within the tax code.
2 Point Highlight
Keep in mind that a tax exclusion is completely different from a tax benefit: Fulfilling the above criteria lowers your taxable income on the house by $250,000/$500,000; it does not give you a lower interest rate or additional benefit on any money that you make beyond this profit margin.
The 1031 exchange sale is the procedure by which many people save money in capital gains taxes by transferring the profit into a new property.
