Capital gains tax is something that you have to pay when you sell something for more than you originally purchased it for. This is something that is often experienced during the buying and selling of real estate for investment purposes. If you are considering selling a home for more than you previously bought it for or you are interested in getting started in real estate investing, it is a good idea to fully understand capital gains tax so you can know what you are getting into and what you can expect in the process.
It Isn’t Just for the Rich
One of the biggest misconceptions about capital gains tax is that it is something that only the rich have to worry about. This could not be further from the truth. In fact, according to the IRS, almost anything you own can be considered to be a capital asset which means that this is something that has the potential to impact anyone at some point in their lives. If you sell something that goes for more than the cash basis, or what you originally purchased it for, then you have to report that on your taxes as income as part of the sale. Because of this, you need to be aware of this tax and how it can impact you, whether you are selling stocks, Pinehurst real estate, or a big screen TV throughout the course of the year. Whether or not you would be considered rich does not impact this at all.
You Home Can Be Exempt
This is where a lot of people get confused with how capital gains tax applies to real estate. For homes that are used as primary residences by the owners for at least 2 years of the past 5 years, the home can be exempt from this. However, there are some other things that need to be considered. The home must also have been owned by the same person for at least two years out of the past 5 years. The other contingency for exemption is that another home can not have been considered exempt in the past two years. If all of these conditions are met then you can exempt up to $250,000 from capital gains tax if you are single and $500,000 if married and filing jointly. However, if these conditions are not met, then the sale of the home and the profits would be subject to capital gains tax.
Capital Losses Can Offset Gains
One of the good things that investors can use to their advantage are capital losses. Of course, no investor wants to lose money on any of their investments but if there have been losses during the course of the year for sales of property, then the losses can actually offset the gains from the sale of other properties. Unfortunately, homes sometimes go down in value but if you are selling properties that have gone up in value, this can actually help you when it comes to taxes. If the capital losses actually exceed the gains in any given year, you can use the losses to offset up to $3,000 of other income in a year and carry any excess over to future years.
Capital gains can be confusing if you do not understand how they work. However, understanding these basics will get you on the right path. It is always best to consult with a professional tax advisor to help with any of the specifics of capital gains and how it impacts you.