CAPITAL GAINS AND TAXES IN REAL ESTATE

 

Capital gains taxes in real estate are the taxes you pay on the profit when you sell a property.

Simple definition

Capital Gain = Sale Price − (Purchase Price + Improvements + Costs)
You pay tax on that gain.

Key points

1. Two types of capital gains

=        Short-term (owned < 1 year)
  Taxed as regular income (higher rates)

=        Long-term (owned > 1 year)
   Lower tax rates: typically 0%, 15%, or 20%

2. Investment property vs primary home

Investment property

=        Fully subject to capital gains tax

=        Plus depreciation recapture (taxed up to 25%)

Primary residence

You may avoid taxes if you qualify for the exclusion:

=        Up to $250,000 gain(single)

=        Up to $500,000 gain(married)

=        Must have lived there 2of the last 5 years

3. Additional taxes (important)

=        State taxes (not in Florida 👍)

=        Net Investment Income Tax (3.8%) for higher earners

Example

=        Bought property: $300,000

=        Sold for: $500,000

=        Gain: $200,000

You pay tax on the $200,000 (unless exempt or deferred)

How investors reduce or avoid it

=        Use a 1031 exchange(defer taxes)

=        Use primary residence exclusion

=        Offset gains with losses

=        Hold long-term for lower rates