6 things you should know about capital gains taxes
We've all heard of (and have probably been terrified of) of the ever-so-daunting CAPITAL GAINS TAX. But do we actually understand what it is, when it comes in to play, and what we can do to avoid it?
***Okay, okay, before we get into it, we should mention that you should definitely verify all of this information with your CPA for your specific tax scenario AND we do believe in being good citizens and paying our fair share of taxes when appropriate.***
But alas, here are 6 hot tips (and explanations) that will help you prepare for your wealth building journey in Real Estate.
1. The basics. The long term capital gains tax is a tax applied to the profits from the sale of an asset held for more than a year. It generally ranges between 15-20% depending on your income and filing status.
2. Right now, there are some breaks that the government offers to help keep more of that profit in your pocket. One example is with your primary residence. When you sell your house that was your primary residence for 2 out of the last 5 years, there is a certain amount of profit you can make from that sale without getting that pesky tax slapped on. So what is that number? Well, for a single person it's $250,000 and for a married couple it's $500,000. You can claim that deduction once per calendar year.
3. If you do have more than a $250,000-$500,000 gain, are you out of luck? Not exactly. You can deduct your Realtor expenses (hey!) and the costs of improvements you've put into your house over the years against that gain. Example: If you made a $300,000 profit, but have spent $80,000 on the house over the last 10 years (that you could prove), you would NOT have to pay that capital gains tax.
4. Something you should consider: Occasionally we hear of people who recently purchased their home (within the last 2 years) and would like to sell it but aren't because they want to “avoid capital gains”. The reality is, between projects you likely did, closing costs, and Realtor fees, you probably don't have a huge profit gain anyway. So you may want your Realtor to run the numbers of what they think you'll net and consider selling when you really want to, not when you think you should.
5. Another thing you should consider: If you think you may be approaching $250,000-$500,000 of equity gain in your home, you should consider having a Realtor assess what they think your home would sell for in today's market. Many people consider selling for years before they do but don't take that tax into account when planning. If your situation is fluid and you're approaching that profit mark, you may consider downsizing now rather than in 3 years from now to save some $$ going towards the government instead of your retirement.
6. One last thing you should consider: If you lived in a house for 2 years but moved out of it less than 3 years ago, you may consider selling it. Whether you upgrade your investment *read: sell your single family house and buy a duplex*, or just put that money elsewhere, at least you're avoiding some tax in that scenario.
Alright, that's enough Uncle Sam talk from us for now. Until next time!