Selling a home is a major financial milestone, but it can come with some profound tax implications. Capital gains taxes are applied to the profits earned on an asset sale, including real estate. Learn more about the intricacies of exemptions and tax liability minimization strategies. So precisely how are capital gains taxes calculated when you sell a home?
Calculating Capital Gains on Home Sales
When you sell a home, capital gains taxes come into play. They're levied on the profit earned from the sale of the property, and calculating that profit consists of two key steps. First, you have to determine your basis. Your basis is what you paid for the home plus the costs of any qualifying improvements you made during the period of ownership; this is the number that will be subtracted from the sale price to determine your capital gains.
Some, but not all, selling costs can be subtracted from your sale price to reduce your capital gains. These include things like real estate agent commissions and closing costs. An experienced tax professional can help you determine which expenses can be deducted.
There are a wide variety of factors that will impact the tax rate you'll pay, from your income level to the length of time you owned the property. For real estate, though, long-term capital gains tax rates are often lower than ordinary income tax rates.
Exemptions to Minimize Capital Gains Taxes
Fortunately, there are several things that can work in your favor when it comes to minimizing your capital gains tax liability. First is the primary residence exemption; if you've lived in the home as your primary residence for at least two out of five years before the sale, you could qualify for an exclusion of up to $250,000 in capital gains for single filers. For married couples filing jointly, that number doubles to $500,000.
If you plan to reinvest the money earned from selling a property into another like-kind property, you may also be eligible for a 1031 exchange. Properties are of like-kind if they're of the same nature or character, even if they differ in grade or quality. This will defer your capital gains tax, but the exchange must be completed within 180 days of the sale date of the first property. A 1031 exchange can have a significant positive impact on your financial health, but it is a complex transaction. It's vital to work with a tax professional to ensure both eligibility and proper structuring of the exchange.
Demystifying Capital Gains Taxes on Home Sales
Understanding how capital gains taxes are calculated and how to navigate those exemptions is crucial for taxpayers seeking to optimize and maintain their financial health after selling a property. To ensure you're making the most informed and beneficial decisions, it's wise to seek out the guidance of a trusted CPA.
At Myrick CPA, we specialize in tax planning and strategies. Our electronic approach streamlines document submission through a secure client portal to ensure a seamless, convenient experience. Whether you're a seasoned real estate investor or a first-time seller, our team is on board to help you navigate the intricate world of capital gains taxes.
Contact us today to discuss tax strategies, and discover how Myrick CPA can help you find the right solutions to devise a path to financial health, tailored to your individual needs.
