Doesn’t it feel good to turn a healthy profit in a real estate transaction? Selling your property can be a lucrative move, but capital gains taxes can reduce your profits. Understanding how to reduce these taxes allows you to keep more money in your pocket.

In general, the calculation to estimate capital gains on the profits of your primary residence is: Sales price minus original cost minus capital improvements minus selling and closing costs equals gain.

From this gain, homeowners may qualify to then deduct $250,000 for a single taxpayer or $500,000 for married couples filing taxes together if you lived in your home for at least two of the last five years prior to a sale.

Then you multiply this by your federal tax rate of a capital gain to determine what you owe based on income:

0% – Income up to $47,025 single, $94,050 joint
15% – Between $47,026-$518,900 single, between $94,051-$583,750 joint
20% – Above $518,900 single, $583,750 joint

General example for married couple with joint income below $583,750 with a $1.5 million sale:

$1.5 million sale price — $750,000 original price — $100,000 improvements — $85,000 closing costs — $500,000 exemption for a married couple = $65,000 gains; then that $65,000 x 15% tax = $9,750 in federal capital gains tax.

There also is an additional state capital gains tax rate. In Massachusetts, it is 5%. Note that a long-term capital gain is a home owned for longer then a year, while a short-term capital gain would be taxed at your ordinary income tax rate. Some exceptions can apply.

Save your receipts of capital improvements (roof, kitchen and bath remodels, additions) to your property to use toward capital gains deductions. Closing costs from the purchase of the property and the sale also can be deducted.

For rental properties, a 1031 exchange allows you to defer capital gains taxes by reinvesting the sale proceeds into a new property (or properties) equaling the same or higher value. While this doesn’t eliminate the tax, it allows you to postpone it until you eventually sell the new property. In theory, you could defer the capital gains tax indefinitely by continuing to use 1031 exchanges each time you sell a rental property.

The rules for calculating capital gains and 1031 exchanges are complex, so consulting a financial advisor and tax professional is highly recommended. Capital gains tax rules are different for investments, vacation homes and inherited properties. More details and detailed worksheets to calculate your capital gains can be obtained by IRS Publications 523, 409 and 701.

Kim Foemmel
Foemmel Fine Homes
1 Lumber Street, Suite 207C
Hopkinton, MA
(508) 808-1149
Kim.Foemmel@gmail.com
FoemmelFineHomes.com

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