Did you know that you must pay taxes on the profit from the sale of your home or investment property? It is important to understand how much you will owe in taxes when deciding what to do. When the value of an investment, such as real estate, experiences growth and is then subsequently sold, there is a tax on the capital gain at that time.
None of the following is financial advice and you should consult your CPA – this information is provided via Investopedia.
- When selling your primary residence you are able to be exempt from the first $250,000 in capital gains and up to $500,000 if you are married and filing jointly. You can use this every 2 years and you can add any cost basis for home improvements onto the aforementioned amounts.
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For the specific rates on capital gains rates, I highly recommend checking out Investopedia on the page I linked above.
For investors who are looking to sell a property, the IRS approaches taxes on these gains in differing ways, depending on whether the investor held the assets, either short or long term.
Investors can deduct your cost basis or original purchase price to determine the capital gains. You can subtract the cost basis and any costs of improvements from the profit from the capital gains.
Planning your investments, from acquisition to resale, should be completed before you ever close on your first real estate investment. A significant part of this overall business plan should include avoiding capital gains taxes when it is time to exit a property. We will explore more about what Philadelphia home sellers need to know about capital gains taxes.
These taxes are capped at a specific limit to restrict the growth of government revenue. Philadelphia home sellers need to understand how these rate limits on capital gains taxes will affect their investment. A capital gain rate of 15% will apply should your taxable income be at least $80,000 but less than $441,450 for single filers, $496,600 for married filing jointly or qualifying widow(er), $469,050 if you plan to file as head of household, and $248,3000 if you are married filing separately.
A rate of 20% will apply to any gain over the top threshold of the 15% rate, with some exceptions. Individuals with significant income may be subject to a Net Investment Income Tax (NIIT). If your capital gains are in the red because of capital losses, the amount of excess loss you can claim is limited as well.
Married vs. Single
In many cases, as we mentioned above there is an exclusion available every two years for Philadelphia home sellers on capital gains taxes of up to $500,000 over cost basis for married couples filing jointly. For single homeowners, the exclusion is $250,000 over the cost basis (how much you spent fixing the house up). One of the qualifying requirements for this exclusion is that the real estate will have been lived in for a total of two of the last five years as your primary residence, though they need not be consecutive.
You may be required to make estimated payments on your capital gains. It is wise to consult with a tax advisor to ensure you are making the right moves for your investments. Deferrals of capital gains are allowed under a 1031 exchange of like properties – this is important for investors to know. There are strategies that you can put into place to offset these taxes with capital losses. Ensuring you have covered all of your bases means it is essential to have built a strong team of professionals to help guide you because you want to keep as much of your money as possible.
Mike Buys Houses understands just what Philadelphia home sellers need to know about capital gains taxes and what you can do to limit their impact – ask how we may be able to help you spread that tax bill out for a longer period.