CAPITAL GAIN TAXES

What Sellers Owe When Selling a Home

About Capital Gain Taxes

Profit from selling an asset is called a capital gain and these profits are typically taxed. This includes the sale of a residence. You may qualify to exclude up to $250k of the profit as an individual and up to $500k if you file a joint return. To qualify, you must:
  • Meet both ownership and use criteria
  • Have owned and made use of the residence as your main home for at least two years of the five years prior to the sale date
  • Have not excluded an additional residence during the two-year period prior to the sale of your home
  • Publication 523 outlines eligibility requirements.

Short Term Capital Gain

Investments held for one year or less are subject to short-term capital gain taxes. Your tax bracket and short term capital gains increase with income. Short-term capital gain is taxed at a higher rate than long-term gain. The percentage of tax changes according to your filing status and income:
For individual filers:
  • 10% $0-$9,325
  • 15% $9,326-$37,950
  • 25% $37,951-$91,900
  • 28% $91,901-$191,650
  • 33% $191,651-$416,700
  • 35% $416,701-$418,400
  • 39.6% $418,401 and above
For jointl filers:
  • 10% $0-$18,650
  • 15% $18,651-$75,900
  • 25% $75,901-$153,100
  • 28% $153,101-$233,350
  • 33% $233,351-$416,700
  • 35% $416,701-$470,700
  • 39.6% $470,701 and above

Long Term Capital Gain

Long-term capital gain applies to investments held for one year + one day and longer.  The rate is based on income and tax bracket. Under current law, most filers are subject to a rate of 15% for long-term capital gain. High earners are subject to a 20% rate and low earners are exempt from long-term capital gain.
New legislation has been proposed to change these rates and brackets. Before planning for your capital gain tax rate, check with the IRS for the most current rules. https://www.irs.gov/taxtopics/tc409.html
  • 10% 0%
  • 15% 0%
  • 25% 15%
  • 28% 15%
  • 33% 15%
  • 35% 15%
  • 39.6% 20%
*These are the rules for 2017. Rules can change annually.

Tools, Tips and Forms

For many, capital gain from selling a home aren’t taxed. The exception is one of the biggest in the tax code. For a single person, up to $250,000 in profit is exempt from tax obligation. If married and filing jointly, that threshold goes up to $500,000 exempt from taxation. There are a few requirements related to getting the tax break:
  • You must provide documentation that the home was your primary residence. The IRS will want to determine the amount of time you spend at the residence, your employment location and its proximity to the residence, your driver’s license state/location, addresses used for your tax returns, voter registration and other official communications.
  • You must have owned and used your home as a primary residence a minimum of two of the five years prior to the sale date.  Ownership and primary residence use needn’t be consecutive or concurrent and it is not required that you are living in the home at the time of the sale. If you occupied the residence fewer than two of the five years prior to the sale you may still qualify for a reduction but the savings will be less. There are also provisions for inherited property, military personnel on active duty and property being sold as the result of a divorce.
  • The exemption is only valid once every two years. You can’t take the exemption on multiple homes within the same two year period.
There are some exceptions where capital gain may be taxed at rates greater than 15%:
  • The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
  • Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
  • The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

From The IRS

From the IRS: Report most sales and other capital transactions and calculate capital gain or loss on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, then summarize capital gains and deductible capital losses on Form 1040, Schedule D (PDF), Capital Gains and Losses. If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term “net long-term capital gain” means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. The tax rate on most net capital gain is no higher than 15% for most taxpayers. Some or all net capital gain may be taxed at 0% if you’re in the 10% or 15% ordinary income tax brackets. However, a 20% tax rate on net capital gain applies to the extent that a taxpayer’s taxable income exceeds the thresholds set for the 39.6% ordinary tax rate ($415,050 for single; $466,950 for married filing jointly or qualifying widow(er); $441,000 for head of household, and $233,475 for married filing separately).   If you have a taxable capital gain, you may be required to make estimated tax payments. For additional information, refer to Publication 505, Tax Withholding and Estimated Tax, Estimated Taxes, and Do You Have to Pay Estimated Tax? If your capital losses exceed your capital gains, the amount of the excess loss that you can claim on line 13 of Form 1040 to lower your income is the lesser of $3,000, ($1,500 if married filing separately) or your total net loss shown on line 16 of the Form 1040, Schedule D (PDF). If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in Publication 550, Investment Income and Expenses, or in the Form 1040, Schedule D Instructions, to figure the amount you can carry forward. Taxpayers with significant investment income may be subject to the Net Investment Income Tax (NIIT). For additional information on the NIIT, see Topic 559. Additional information on capital gains and losses is available in Publication 550 and Publication 544, Sales and Other Dispositions of Assets. If you sell your main home, refer to Topics 701 and 703, and Publication 523, Selling Your Home.

From A District of Columbia CPA

Because capital gain taxes can involve complex calculations and knowledge of the rules of law pertaining to real estate taxation, you should seek advice from a tax professional expert in real estate taxation. This webpage by Kronzek, Fisher & Lopez, PLLC is a helpful resource for preliminary questions and planning. It lays out many of the scenarios common to the sale of real estate.

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Realtors are not CPAs or attorneys and are not permitted to give tax or legal advice. Refer to a tax or legal professional for all related matters. Any information provided on this site pertaining to such issues should be verified by experts and is provided solely for the purpose of illustration. Resources cited are believed to be accurate but are not guaranteed and are subject to change without notice. The Isaacs Team LLC, it successors and/or assignees/affiliates accept no responsibility or liability for the content herein.
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