What to Know About Capital Gains Tax When Selling Your Property
Whether it is time to move on to a new location or unload a vacation investment property, considering taxes for home sales is necessary to ensure a solid profit. The most important taxes are capital gains taxes. The Internal Revenue Service views profits as a possible taxable capital gain depending on a few factors. Keep reading to find out everything you need to know about capital gains taxes when selling real estate.
The Principles of Capital Gains Taxes
The IRS uses the term "basis" in the realm of taxes as a reference to what profit amount from a property sale can be taxed for capital gains purposes. To the factor, the basis for capital gains taxes, take the initial costs of the home and deduct depreciation value and out-of-pocket repair expenses to get a basis estimate. Possible capital gains deductions include:
- Acquisition Fees
- Home Improvements
- Sales & Excise Taxes
- Major Repairs
- Building Additions
After deductions, profits exceeding the basis calculation will be considered for capital gains taxes and must be declared as income with the IRS.
Taxes on selling a vacation property that has never been rented are calculated similarly to a second home, as the IRS considers them personal capital assets. The basis will depend on the time of ownership to decide if gains are short or long-term.
Taxes on selling a rental house are impacted by depreciation, annual taxes and other losses that can qualify owners for specific offsets for capital gains taxes. (More on that later.) If sellers intend to buy another rental property after selling the current one, they may be eligible for the benefits of 1031 exchanges.
Codes That May Exclude Capital Gains Taxes
Even factoring basis reductions, if a home or property is sold in a hot market, there can be a reasonably high capital gain to contend with. Fortunately, a few tax codes may qualify sellers for capital gains exclusions. Many sellers will find that they meet these criteria, especially those selling a single property versus a multi-family investment property. Such circumstances predominantly include that properties must be a primary residence for owners, and no prior exclusions for capital gains have been taken in the last two years.
How Time of Ownership Impacts Capital Gains Taxes
How long the property is owned also plays a role in calculating capital gains. This is where short-term gains and long-term gains are considered for tax purposes. A short-term gain is when a home is sold before two years of ownership, and profits are taxed as ordinary income. Long-term gain exemptions are available for those who meet the qualifications above and have owned and primarily lived in residence longer than two years.
To clarify the requirements of what "full-time" residency is considered. Essentially, living off the property for durations longer than six months consecutively disqualifies full-time status. That being said, another perk besides capital gains tax savings for full-time owner-occupants is that there is an automatic $250,000 exclusion for individual owners and double that for married couples.
Taken Financial Losses? This Could Offset Capital Gains
When the property seller has other investments that have resulted in financial losses, capital gains can transition into a capital loss that offsets profits from property sales. This includes stock investments, other homes or investment properties, and inevitable losses soon.
It is an excellent decision to consult with a financial professional or real estate lawyer, or broker to help navigate what could be considered a capital loss beyond these. Keep in mind, tax laws change routinely, and the experts will know how to guide home sellers towards ways to save on capital gains taxes.
Don't Fear Capital Gains Taxes When Selling a Breckenridge Home
Breckenridge real estate market updates show that the rising cost of homes could see sellers facing high taxes along with excellent profits. However, there's no need to pay more than you have to! You can pay your fair share without stress by researching property sale taxes and effectively calculating your capital gains.