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What is Capital Gains Tax?

Monday, April 1, 2019   /   by Dixie Simon

What is Capital Gains Tax?

If you make money on a home sale, you may have a tax bill coming.

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Selling your home and finding a new place to live can be exciting—especially if you anticipate making some money in the process. As anyone who has received a paycheck knows, earning income and paying taxes go hand-in-hand. If you stand to profit from selling your home, you may be subject to the capital gains tax. So if you’re wondering, “What is the capital gains tax?” then you’ve come to the right place. Here are some of the factors that affect capital gains tax.
How Long Have You Lived There? 
There are two rates for the capital gains tax: 

The short-term capital gains rate and the long-term. If you’ve owned your home for one year or less when it sells, those earnings may be subject to the short-term capital gains tax. The short-term tax corresponds to your regular income tax bracket.
The long-term capital gains rate applies if you’ve owned your property for more than a year. In this situation, the rate tends to be much lower than the short-term rate—ranging from 0 to 20 percent.
You might think an expensive home will be subject to a higher capital gains tax, but the actual cost of the real estate doesn’t matter. What’s important is how much you profit from the sale. A house purchased for $800,000 and sold for about the same amount could be taxed next to nothing, while a one bought for $350,000 and sold for $500,000 will rack up a much bigger tax bill.
Did you renovate the kitchen, replace the green shag carpet or add a pool? It’s always a good idea to keep detailed notes of the improvements you make to any real estate holding, as the money you put into it counts towards the overall cost of your property. Keeping a record of home improvements alone could close the gap between what you paid for the house and its selling price—meaning you could be responsible for less in capital gains taxes when it sells.
You don’t pay capital gains tax unless you make a certain amount of income, and the rate you pay increases as your income increases. That “certain amount” is different depending on whether you’re single, married and filing jointly or, married and filing separately.
If you’re a house-flipper by trade, your sales are considered inventory rather than capital assets, and all gains earned will be taxed as income. On top of that, house flippers aren’t allowed to avoid the tax by rolling profits over into their next home purchase.
If your home is your primary residence, you could get significant capital gains "break. If you have lived in the house for two of the five years before the sale, you could exclude sales income up to $250,000 if you’re single and up to $500,000 if you’re married filing jointly.
The flip side is that if you’re selling a vacation home or rental property, you won’t qualify for this exemption. Instead, you’ll be subject to the regular capital gains tax—either the short-term or long-term rate, depending on how long you owned the property.

In review, here are the factors for Capital Gains Tax Awareness as discussed above:

  • How Long Have You Lived There? 
  • Amount of Profit
  • Amount You Invest Into Your Home
  • Your Income and Marital Status
  • If You’re a Real Estate Investor
  • If It’s a Primary Residence

For more information please speak with your accountant and/or attorney since this is an IRS question. But when you are ready to find that new home, vacation property, or investment...I'll be here. Don't hesitate to call.

Thanks again for visiting dixie@viewhomesinspokane.com

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