It’s important to know that profits from the sale of your home or investment property are subject to taxes. This is a surprise that can be costly, especially given how much taxes can take from your profits. It’s even more critical to avoid this surprise when you’ve invested a significant amount of time and money in your property. Capital assets, including real estate, appreciate in value over time and are subject to capital gains tax when sold. In such cases, the investor is considered to have realized their capital gains at the time of sale.
The IRS has different approaches to taxing gains based on whether an investor held assets for a short or long period. To determine the capital gains, investors can deduct their original purchase price, or cost basis. Subtracting the cost basis and any costs of improvements from the capital gains can provide the profit.
It’s crucial to plan your investments, from acquisition to resale, before closing on your first real estate investment. A crucial part of this plan should involve finding ways to avoid capital gains taxes when exiting a property. In this regard, it’s essential to explore what home sellers in Montgomery County need to know about capital gains taxes.
Limits
Understanding capital gains taxes is crucial for homeowners and real estate investors in Montgomery County as they can significantly impact investment returns. Capital gains taxes are imposed on the profit earned when selling an asset, such as a home or an investment property. These taxes are capped at a specific limit, which restricts the growth of government revenue.
Capital gain tax rates vary depending on the amount of taxable income and whether the investor held the asset short-term or long-term. For single filers with a taxable income between $80,000 and $441,450 or married filing jointly or qualifying widow(er) with a taxable income between $496,600 and $469,050 (if filing as head of household), a capital gain rate of 15% will apply. If your taxable income exceeds these limits, a rate of 20% will apply to any gain over the top threshold of the 15% rate, with a few exceptions.
It’s worth noting that individuals with significant income may be subject to a Net Investment Income Tax (NIIT) of 3.8% on the lesser of their net investment income or the amount by which their modified adjusted gross income exceeds $200,000 for single filers and $250,000 for married filing jointly or qualifying widow(er).
When a homeowner sells their primary residence, they can exclude up to $250,000 of capital gains from their taxable income ($500,000 for married couples filing jointly) if they lived in the home for at least two of the five years before selling. This exclusion does not apply to investment properties.
If an investor incurs capital losses from selling assets, they can offset them against capital gains to reduce their tax bill. However, if the losses exceed the gains, the amount of excess loss that one can claim is limited.
Therefore, planning your investments from acquisition to resale is essential to maximize investment returns while minimizing tax liabilities. Strategies such as tax-loss harvesting, 1031 exchanges, and opportunity zones can help real estate investors avoid or defer capital gains taxes. It’s crucial to consult with a tax advisor or financial planner to understand the tax implications of real estate transactions and develop a tax-efficient investment strategy.
Married vs. Single
In many cases, there is an exclusion available every two years for Montgomery County home sellers on capital gains taxes of up to $500,000 over cost basis for married couples filing jointly for single investors. The exclusion is $250,000 over cost basis. 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. 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.
Property Buyer Today understands just what Montgomery County home sellers need to know about capital gains taxes and what you can do to avoid them – sell to Property Buyer Today or buy a “like-kind” investment from our inventory of great investment properties! At Property Buyer Today, we make it easy to keep your hard-earned investment profits at work, earning wealth and long-term passive income for you! Call Property Buyer Today at 844-977-3336 or send us a message today!