Among the myriad costs associated with selling a home, taxes for capital gain on real estate can take up a significant portion. You'll have to pay capital gains tax depending on how long you've owned the property before selling it, and rates can vary by region.
Here is a basic rundown of capital gains tax to help you learn more:
Short-term versus long-term capital gains tax
When you start thinking about selling an investment property, one of the most important questions to ask is, “When did I purchase it?” Capital gains and losses can occur over short or long periods, and have different tax rules. If you've had the asset for less than a year, it counts as short-term.
How much capital gains tax can I expect to pay on real estate?
Short-term capital gains taxes use the same percentage as income taxes, which can be upwards of 37%. A long-term capital gain on a property you've owned for more than a year is taxed at a lower rate of 15% to 20%.
How real estate taxes work
State and local authorities collect taxes on real estate to support public services, school projects and other services - just like income tax. However, real estate tax rates are determined by multiplying current tax rates by the value of the properties. Tax rates vary among jurisdictions and may vary depending upon the assessed value of the home.
How to avoid capital gains tax on home sales
The simplest way to reduce the cost is to stay in your house for more than one year. This will take you from short term capital gain into long term capital gain, and a lower tax rate.
You can avoid capital gains tax by completing a 1031 exchange, which is a specific type of real estate transaction for investment properties. This is a popular method among real estate investors, but only works if the property you're selling is not your primary residence.
Taxes can be complicated, and real estate is no exception. However, understanding these basics will help you better navigate the real estate world and make the best financial decisions for your future.
About the Author
Kevin Kelleher
What sets me aside from other agents is my extensive knowledge and experience. I started out as a young man in construction, learning everything from anyone that could teach me, so before long I had my own company as a remodeling contractor. I then specialized in historical renovations, before long I had the pleasure of working on great jobs with great clients for over 30 years. For the past 12 years, I have been enjoying the process of assisting my faithful clients with real estate transactions. My knowledge of houses has given my clients a huge advantage when viewing properties and what is needed when selling. I have always enjoyed working with people and helping them in probably the largest investment they will make. I hope you will give me the chance to show you that honesty and hard work does pay off in the end whether you're buying or selling.
