When buying a home, there are things you still need to consider. Among these things, a new home may be subject to capital gains tax.
What is Capital Gains?
In essence, capital gains tax refer to the increase in the capital asset’s value. It is realized when that particular asset is sold.
This tax can be short term when you have owned the asset for less than a year and the rate you will pay is equal to the amount of an ordinary income tax rate or your tax bracket. It can also be a long-term tax which is the case if you have owned the asset for more than a year. The rates for long-term capital gains rates vary. Some people qualify for a 0% tax rate and others need to pay either 15% or 20%. The rates depend on the status and income you file.
Capital gains are usually associated with stocks and funds because of their volatility in pricing. But on real estate, a home must be first considered a primary residence based on the Internal Revenue Service (IRS) qualifications and rules.
When Should a Seller Pay for Capital Gains?
If you purchase a home and in a year it has increased in value and you decide to sell it, you are then required to pay capital gains tax. In the case that you have owned a home for at least two year, you may also be subject to pay tax if the profit from the sale of the house surpasses the set limit of the IRS.
The limits include $250,000 for single persons and $500,000 for married persons. Short term capital gains are taxed like ordinary income. For high-income earners, their rates may go as high as 37% of the profit. Long-term capital gains tax rates are applied according to the income and tax filing status and the rates may be 0%, 15%, or even 20%.
Taxpayer Relief Act of 1997
Before the Taxpayer Relief Act of 1997 was implemented, sellers had to put the profit of the sale of a house into another home within two years to be exempt from paying tax. But after its implementation, sellers were given freedom to use the money however they wanted. This Act provided sellers with benefits because it changed the implication of what can be done with the sale of their homes.
When is a Home Taxable?
Sale of a house is taxable when a home is not the seller’s principal residence, if the property was bought through a 1031 exchange and within five years, if the seller is subject to expatriate taxes, or if the property was not owned as the seller’s principal residence for the last two of the last five years before it was sold.
Conclusion
Paying taxes is mandated by law but there are legal means that may help reduce it or even exempt a seller from it.
For more information, you can ask our home buyers at SnapCashOffers.com for more information on how to sell your house.
Source: https://www.investopedia.com/ask/answers/06/capitalgainhomesale.asp
