Can Capital Gains Taxes Be Deferred into The Future?

What Are Capital Gains Taxes?

Capital gains tax applies to the profit made from selling your real estate assets. There are exclusions and conditions under which you can minimize or even avoid these taxes.

Key Exclusions:

  • Single homeowners can exclude up to $250,000 of capital gains.
  • Married couples filing jointly can exclude up to $500,000.

These exclusions are under the Section 121 exclusion of the IRS code.

Eligibility Criteria for Exclusion

To benefit from these exclusions, certain conditions must be met:

  • Principal Residence Requirement: The property sold must be your principal residence. This includes a broad category of homes like condos, mobile homes, and even houseboats. To qualify, the property should be where you spend most of your time.
  • Ownership Duration: You must have owned the home for at least two years in the five-year period before the sale.
  • Residency Requirement: You should have lived in the property for at least two years within the same five-year timeframe.

Exceptions and Disqualifications

  • Properties not meeting the principal residence criteria.
  • Homes owned for less than two years.
  • Claiming the exclusion on another property within the last two years.
  • Properties acquired through a like-kind exchange in the past five years.
  • Individuals subject to expatriate tax.

Calculating Your Capital Gains Tax

The tax is calculated on the profit, which is the difference between the purchase price and the selling price of your property. For instance, if you bought a home for $200,000 and sold it for $800,000, the profit is $600,000. Depending on your filing status, a portion of this may be exempt from tax.

Capital Gains Tax Rates

  • Short-term capital gains tax is levied on properties held for a year or less, equating to your ordinary income tax rate.
  • Long-term capital gains tax is for properties held for more than a year, with significantly lower rates of 0%, 15%, or 20%, depending on your income and filing status.

Strategies to Avoid Capital Gains Tax

  • Reside in the Property: Living in the house for at least two years can significantly reduce your tax liability.
  • Check for Exceptions: Certain circumstances like work-related moves, health reasons, or unforeseen events may qualify you for partial exclusions.
  • Home Improvements: Keeping a record of home improvements can increase your cost basis, thereby reducing the taxable gain.

Myth Busting: Over-55 Exemption

A common misconception is the over-55 home sale exemption, which allowed a one-time $125,000 exclusion. This was replaced in 1997 with the current $500,000 exclusion applicable to a broader demographic.

Conclusion

Navigating the realm of capital gains tax can be complex, but with the right knowledge and strategies, you can significantly enhance the profitability of your real estate investments. Stay informed, consult professionals when necessary, and leverage these insights to make informed decisions.

We hope this newsletter provides valuable insights into your investment journey. Stay tuned for more updates and strategies in the world of real estate investment.



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