The capital gains tax on home sale calculation is a very important one in your overall real estate negotiation. However, there are many pitfalls that you may run into without even knowing it, and this directly affects your bottom line. Here are three of the most common mistakes that people make when trying to incorporate your capital gains tax into your real estate negotiations.
Why are quick flips taxed at a higher rate?
Your primary residence is a special tax case if you sold your home at a profit. Real estate has many of the same limitations as paper securities such as a higher tax rate for quick flips. IRS Publication 523 will give you the details that you need on the exact time frame, but you may want to consider the implications of waiting just a few days or weeks in order to save a bundle on taxes. According to this document, your house qualifies for maximum exclusion if three conditions have been fulfilled: First, your primary residence has been your primary residence for at least two of the past five years; second, the home was not acquired at a 1031 exchange sale; and third, you claimed no exclusion on any other sale within a two year period that ended on the date of the sale of the home. If all of the above are true, then you are eligible for up to a $250,000 exclusion from all capital gains. If you are married and filing jointly, then this exclusion rises to $500,000.
If you already have an income that places you into a high net worth or income bracket, then you may be responsible for an additional 3.8 percent tax. The cutoff for the tax is every single person with an adjusted gross income that is above $200,000 and married couples filing jointly with an adjusted gross income of $250,000. This tax only affects properties that exceed the capital gains exclusion mentioned above.
Am I keeping track of my cost basis correctly?
Keeping track of the cost basis is also a very important aspect of keeping your money in your pocket. Many people overpay because of a misappropriated cost basis and never even know that they just gave away free money. The Figuring Gain or Loss Section in Publication 523 will tell you the majority of what you need to know in order to create the most appropriate cost basis for yourself, but you should never attbpt a large asset sale without the aid of a professional agent and accountant, especially if you are unsure at any point in the calculations. Online calculators are a great place to start, but not to finish. Do not let a back of the napkin calculation cost you tens, or even hundreds of thousands of dollars because you were being too cheap to pay a $500 consultation bill.
In general, you will start with the price that the house sells for at the top of your simple equation. You will subtract your selling expenses, which may vary. This may also be a great time to use an accountant and a tax lawyer to help your calculations. Subtracting the selling expenses from the selling price gives you the amount realized.
The amount realized minus your adjusted basis gives you the gain or loss that you have on the property. However, the basis can be adjusted many different ways depending on your accounting methods, your municipality, and many other factors. Unless you have plenty of time to study real estate tax law deeply and go over your calculations multiple times, this is best left to the professionals. Your capital gains depend on it.
Am I trying to transfer funds into a new property?
The rules for paying capital gains tax are always changing when it comes to real estate investors. In general, the government tries to protect investors who are trying to sell out of one property and buy immediately into another by reducing the tax burden, sometimes completely eliminating it. However, you must be able to navigate the barbs of these transactions in order to take advantage of these tax deferrals.
Under a 1031 exchange sale, if you purchase a new property within a certain time frame of selling an old one, you can defer the tax liability until you sell the second property. However, this does not apply to investment properties that are not serving as your primary residence that you have been renting out for three or more years and you are living overseas.
The like-kind sale is the sale that will give you the tax deferral. If you bought a condo at first, then you must buy another condo in order to defer the taxes. You cannot switch from a condo to an unattached single family home, for instance. You may also not buy property outside of the United States after selling property inside of the United States: This is not considered a like-kind sale under any circumstances by the government.
In order to take advantage of a like-kind sale, you must also find the second property within 45 days of selling the first one. You must close on it within 180 days.
2 Point Highlight
The Figuring Gain or Loss Section in Publication 523 will tell you the majority of what you need to know in order to create the most appropriate cost basis for yourself, but you should never attbpt a large asset sale without the aid of a professional agent and accountant, especially if you are unsure at any point in the calculations.
In general, the government tries to protect investors who are trying to sell out of one property and buy immediately into another by reducing the tax burden, sometimes completely eliminating it.
