Capital Gains Rules for Real Estate

Anytime a person acquires a real estate property asset and then later sells it for any sort of profit, it becomes a capital gain. In the U.S. capital gains are taxed by the IRS. As such, it is to your benefit to fully understand capital gains tax laws with regards to real estate property. This may help you reduce your tax liability on such transactions.

Short-term vs. Long-term

Real estate can be taxed as a short-term capital gain, but it can also be considered long-term or ordinary gain. It depends on how the property will be used by the owner or taxpayer.

For short-term capital gains, the rate can vary, but usually remains within the 10 to 35% range. For long-term gains, things are different. Assets owned for more than one year will generally be taxed under a different rate, while other long-term assets will have a rate applied that is dependent upon which ordinary income tax bracket the taxpayer falls under.

It is possible to qualify for a zero percent rate if one’s income, including the capital gains, falls in the 10 or 15% brackets. Properties will be charged at a 15% rate for those who have a total income that falls under the 25% or higher brackets.

Capital Gains for Rental Properties

A property that is being rented will be taxed as a combination capital gain, but will also fall under depreciation recapture tax rates. This means that the government is considering that the property is a profitable venture, but is also factoring in the fact that buildings tend to depreciate in value over time when calculating taxes.

Determining the actual gain or loss someone incurs from the sale of such a property requires several details. The selling price, the adjusted basis, subsequent improvements made to the property, and the depreciation are all factors in the computation. Note that depreciation recapture rates are applied to the full amount, while capital gains tax rates are usually applied to what is left after depreciation is factored in.

Capital Gains Tax on the Sale of a Home

Profits made off real estate used as someone’s primary residence can qualify for some forms of special capital gains exclusions. Single owners can exclude up to $250,000 from the profits of the sale, while married couples can exclude up to $500,000.

To qualify as “primary residence”, however, the property must follow these rules:

– In the five years prior to the sale of the property, however, the owner must have lived in the house for a minimum of 24 months

– The 24 months out of the five-year period need not be consecutive

– Property mortgage rates have no bearing on qualification

Possible exclusions may apply for those who have lived on the property for less than 24 months. Exceptions can be considered if the house was sold because the taxpayer had to move because of work, or some similar unforeseen circumstance.

If the property is a second home or is otherwise not acting as the primary residence, it will be treated either as a short- or long-term capital gain, based on how long the house has been the property of the current owner.


Understanding Property Tax

All homeowners are required to pay property taxes. But how deep really is our understanding of these taxes? Sure we know that they depend on the value of the property and the tax rate at the time. However, are there other important information about them that we should be aware of?

Real versus Personal

There are two major categories of property: real and personal. Generally, real properties include land and other immovable features built or installed on it. Some examples of them are houses, apartments and shopping centers.

Meanwhile, personal properties are those that are not covered by the real category. They can be any items that are not attached to the land and are oftentimes mobile. For instance, livestock, cars and computers. But for clarity sake, real properties are further divided into two subcategories: tangible and intangible. Falling under the tangible group are physical objects such as those mentioned above, while under the intangible group are physical attributes such as patents and copyright.

It is essential to know these things and the categories where they belong because the rates used for taxing them vary.

Property Tax

Now, you must be familiar with the tax on your residential property. This, as you must know, is that tax charge yearly on your primary residence. This is calculated by determining the market value of your property, the applicable deductions and the tax rate. Once you have taken away the necessary deductions from the market value, then the result will be multiplied by the tax rate.  Keep in mind that the tax rate and the applicable deductions depending on what state you are in; which is why it is recommended to call your local tax officer.

More often than not, you can file a tax appeal during the reassessment of your property. If you feel that your property has not been assessed properly, it is probably best to consult a property tax lawyer or a tax consultant regarding your concerns.

Exemptions and Incentives

Yes, there are also exceptions in property taxes, thus you might want to verify if you qualify for them. Usually, senior citizens and the handicapped are off the hook.

Similarly, you should also be in the know when it comes to different tax incentives of the properties you have. Confirm if you qualify for any of the incentives offered by the government to first time buyers. If you are in the dark, then better consult your property tax lawyer about this.