Real estate is a good investment until it comes to paying capital gain tax on your property. Getting a fair price for your property with a lot of profit and capital gain tax comes hand-in-hand. But here is the good news. There are several ways to reduce or avoid paying a massive amount of your profit in CGT.
-What is the capital gain tax on real estate?
Capital gain tax is the difference between what you paid for that property (your cost basis) and what you sell it for is taxed by the IRS and several states (your sale price). According to U.S federal tax policy, 20% tax is applicable on all assets you have owned for more than a year.
The selling price of the assets – Purchase price of the assets = Capital Gain
investments such as stocks and bonds and tangible assets such as vehicles, boats, and real estate may be subject to capital gains taxes. Your capital gain tax is calculated on your income at the time of selling.
For example, So, for example, say you bought a property for $350,000 ten years ago. You are selling it today for $550,000. If we calculate the capital gain tax on it, you would owe $200,000 (this is the difference between your purchase price and selling price).
-What are Long-term and short-term capital gains taxes?
- Long-Term Capital Gain:
If you remain the owner of an asset for more than a year and then decide ‘I want to sell my house in New Jersey, the tax rate on your profit will be reduced. According to IRS, people who fall in the category of the lower taxpayer have an advantage of paying zero amount for capital gains rate, and people in the high-income taxpayer have the benefit of saving 17% off from the overall income rate.
- Short-Term Capital Gain:
The gains you get while selling the assets after holding them for a year or less than a year are called short-term capital gains. You will not get benefits from the special tax rate if you fall in the category of short-term capital gains.
-Calculate Your Capital Gain Tax Rate First:
The majority of people have misconceptions about capital gains tax. They assumed it to be the overall profit when they sold the property. That’s not the case. Capital gains depend on how long you have owned an asset, and you only have to pay 20% as tax. It is calculated according to your income (interests, royalties, rents, etc).
For example: if you are a couple filing jointly for the capital gain tax reduction for a property of $500,000, selling it for $850,000 with a taxable income of $10,000 after holding it for more than a year; your estimated capital gain is $350,000 and your estimated capital gains tax is $41,880.
-5 Ways to Avoid Capital gain Tax as a Pro:
- Long Term Investment plan
If you have to sell your property within one year of purchasing, the profit you get is considered a short-term capital gain. You will have to pay a greater tax percentage. On the other hand, an asset you have held for more than one year has a much lower tax rate, approximately 0% to 20%.
So, a plan to make your property “for sale” after a year or maybe after making it a long-term investment can save you from the drastic burden of paying great figures CGT.
- Sell during the low-income year.
As I mentioned earlier, capital gain tax depends on how much you are earning when you plan to sell your property. Low income means less capital gain tax. To lessen your CGT burden – sell your property when you have a low-income year.
Selling your property after your retirement is also a great idea. By doing so, you can harvest capital losses and take advantage of your low income. For this, always keep an eye on your revenue and plan to sell when income is at its lowest.
- Keep an eye on House expenses.
If you are selling your primary residence, keeping a track record of your house expenses and renovation charges can help you deduct your capital gain tax. Also, you don’t need to spend a huge amount while selling your property as it affects your capital gains tax. The deduction in property expenses at the time of selling can be a reason for a lesser amount of capital gains tax.
This is the best plan for those selling their own residence; otherwise, you have to consult a tax advisor if you have a number of properties and you are a real estate investor.
- Put 1031 exchange into service.
This plan is entirely for real estate investors. It states that “this works when you roll all the proceedings when you sell your investment property to purchase like-kind property within 180 days, your capital gain tax automatically deferred”. In simple words, you are actually reinvesting the funds in a similar kind of property for investment purposes to reduce your capital gain tax. It is an effective plan that never fails.
Never confuse “like-kind” with the same kind of property. You have to follow specific rules while doing a 1031 tax-deferred exchange. For example, the property you plan to buy must be for investment purposes. The only condition is like-kind property.
- Go for Primary residence exclusion.
You can never go wrong with primary residence exclusion, as you can deduct up to $250,000 in capital gains (or $500,000 for married couples) from the sale of your property. If a family stays in the same home for decades, they pay more tax than a family who shifted houses.
Savvy homeowners who may relocate or require money do so more regularly to avoid the tax. It is recommended never to sell or buy houses needlessly.
Pro-Tip to Avoid Capital gain tax on Real estate in 2022:
It is recommended to avoid selling your house in less than a year. To qualify for the capital gains exclusion, you must wait at least two years after selling your home. Even if you don’t qualify for the exclusion, you can still pay the lower tax rate on investment assets in most cases. It is called a long-term investment plan, only applicable to properties you own for more than a year.
For your information:
Capital gains are currently taxed at 23.8 percent for the wealthiest Americans. It includes the “long-term capital gains” tax, a 20% tax on investments held for more than a year.
Final thoughts:
Besides many advantages investment property offers, including a source of passive income, an increase in property value, and tax benefits, IRS demands its share in the shape of capital gain tax. But, no worries! This information will prove to be a great help when dealing with capital gains tax.
It is worth noticing that you need to implement most plans a year before selling your property, such as converting your property into your own residence. Suppose you still need any help avoiding capital gain tax on your property. In that case, you can contact trusted buyers like DNT Home Buyers for the best advice as you can get sincere advice from their real estate professionals 24/7 available on call.
Frequently Asked Questions
1- Is it possible to sell houses without paying tax?
Yes. But there are certain criteria to meet before selling your house.
- You must have owned the house and used it as your principal residence for at least two years. These two years don’t need to be consecutive.
- You must not have sold a home in at least two years to claim the capital gains tax exclusion.
- The seller does not owe taxes on the sale of their home if the gains do not exceed the exclusion threshold.
2- How can I avoid paying capital gain tax while selling my house?
There are several ways to avoid paying capital gain tax on real estate.
- Consider using the 1031 exchange.
- Use IRS Primary residence exclusion.
- Sell during less income year.
- Use a long-Term Investment plan.
3- How much capital gain tax do I have to pay while selling my house?
It varies in both cases, long-term capital gain and short-term capital gain. For property you own for more than a year, it’s 15% to 20%. If you are selling a property for owning less than a year, the capital gain tax is almost 37%.
4- What is the Long-term capital gain tax rate for 2022?
Here is the detail of the capital gains tax rate for 2022:
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
| Single | Up to $41,675 | $41,676 – $459,750 | Over $459,750 |
| Married Filing Jointly | Up to $83,350 | $83,351 – $517,200 | Over $517,200 |
| Married filing separately | Up to $41675 | $41,676 – $258,600 | Over $258,600 |
| Head of household | Up to $55,800 | $55,801 – $488,500 | Over $488,500 |