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.