Real Estate

What You Need to Know About Avoiding Capital Gains Taxes on Real Estate


Imagine making $300,000 and not having to pay taxes on it. This is a tax break for homeowners who sell their home for gain–as long as they have lived in the house at least two years during the five years before the sale.

As a couple, you can shelter $500,000. This is important to note as the capital gains tax rate is 20 percent for people in the top tax bracket. As a result, it is imperative to have a clear understanding of capital gains tax.

Continue reading to learn more.

Rich People Aren’t the Only Ones Concerned with Capital Gains

If you sell a capital asset, capital gains taxes may apply. According to the Internal Revenue Service, almost anything you own can qualify as a capital asset. it doesn’t matter whether it is real estate, an investment in stocks, a car or a boat.

Selling the item for more than your basis means the difference is a capital gain. When it’s time to file taxes, you will need to report that gain. Basis is what you paid for the item. This includes the cost, taxes, shipping fees and installation.

In addition, if you spent money on improvements–that will increase the value of your basis. On the other hand, depreciation can reduce your basis.

The Basics of Capital Gains Taxes

It is critical to note that there are two different rates for capital gains. This can help you decide how and when to sell your property.

1. Short-term capital gains.

These are taxed at ordinary income tax rates. To illustrate, it is the rate you pay on work, freelancing or interest income. Of course, this varies based on your full taxable income–but, it is usually between 10 percent and 39.6 percent.

2. Long-term capital gains.

You will get better rates on long-term capital gains. In fact, they can be as low as 0 percent to up to 20 percent–it depends on your income. You can qualify for these rates if you hold your property for a minimum of one year.

Special Rules for Home Sales

As stated earlier, there are particular rules around home sales. To achieve the full benefit of the IRS capital gain exclusion, you must have lived in your home for two of the last five years.

Then, you can qualify for the exclusion of $250,000 for a single home owner and $500,000 for a couple.

Proving Your Home’s Adjusted Basis

Over the years, you might have made improvements on your home. Check out the IRS’s Publication 523, which lists improvements that increase the basis. These types of improvements must last over a year and include:

  • Central air
  • New flooring
  • Landscaping
  • Sprinkler systems
  • Bathroom additions
  • Attic insulation
  • Alarm systems
  • Satellite dish

A simple repair is considered maintenance but does not add to the basis. The only way to include repairs as improving the home’s basis is if they are part of a comprehensive remodel.

Nonetheless, you must keep track of everything with records and receipts. Furthermore, you must know your gain and report it accurately.

Final Thought

As you can see, capital gains taxes can be confusing if you are uninformed. Start researching today to ensure you can make the most of your capital gains.

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