Tax Benefits | Mortgage Lenders in Raleigh NC

Understanding Capital Gains Tax: A Comprehensive Guide for Home Sellers by Mortgage Broker Logan Martini

July 16, 2023 by Kevin Martini

In the ever-evolving world of real estate transactions, it is crucial for home sellers to possess a profound comprehension of the implications of capital gains tax. The sale of a home is a significant financial decision, and being well-informed about the tax aspects can enable you to make educated choices and maximize your financial gains. In this comprehensive guide, we will explore the intricacies of capital gains tax, providing valuable insights to navigate this crucial aspect of selling your home.

What is Capital Gains Tax?

Capital gains tax refers to a tax levied on the profit earned from the sale of an asset, including real estate properties. When you sell your home at a higher price than the original purchase cost, the difference is considered a capital gain. This gain is subject to taxation by the government. Understanding how this tax is calculated is essential to ensure compliance with the law and optimize your financial gains.

Determining Your Capital Gain

To ascertain your capital gain, you must calculate the disparity between the sale price of the property and its adjusted cost basis. The adjusted cost basis refers to the original purchase price of the property, adjusted for various factors such as improvements, depreciation, and transaction costs. Maintaining meticulous records of these expenses is crucial for accurately calculating your capital gain and reducing your tax liability.

Types of Capital Gains

There are two types of capital gains: short-term capital gains and long-term capital gains. The categorization depends on the duration you held the property before selling it.

Short-term Capital Gains

If you held the property for one year or less before selling, the resulting capital gain is considered short-term. Short-term capital gains are typically taxed at your regular income tax rate, which can be significantly higher than long-term capital gains tax rates.

Long-term Capital Gains

If you held the property for more than one year before selling, the capital gain is classified as long-term. Long-term capital gains enjoy preferential tax rates, which are generally lower than regular income tax rates. The exact tax rates for long-term capital gains vary based on your income level and the applicable tax laws.

Exemptions and Deductions

Although capital gains tax is applicable to most real estate transactions, there are certain exemptions and deductions that can help reduce your tax liability.

Primary Residence Exemption (a.k.a. Section 121 exclusion)

If the property you are selling is your primary residence and you meet specific criteria, you may qualify for a primary residence exemption. This exemption allows you to exclude a portion of your capital gain from taxation. According to U.S. tax laws, you may be able to exclude up to $250,000 of your capital gains from tax if you are single, or up to $500,000 if you are married and filing jointly. This exclusion is available if you have lived in and owned the home for at least two of the last five years before selling. It is important to refer to IRS Publication 523 and IRS Publication 544 for more information and to consult with a tax professional to understand the eligibility criteria, as specific rules and limitations apply.

Taxable Gain Exclusion

Even if you have a taxable gain on the sale of your home, you might still be able to exclude a portion of it if you sold the house due to work, health reasons, or “an unforeseeable event,” as defined by the IRS. For specific details and eligibility requirements, you can refer to IRS Publication 523.

Capital Improvements

The cost of capital improvements made to your property, such as renovations or additions, can be added to your adjusted cost basis. By increasing the adjusted cost basis, you effectively reduce your capital gain and subsequently lower your tax liability.

Strategies for Minimizing Capital Gains Tax

While it is not possible to completely avoid capital gains tax, there are several strategies you can employ to minimize its impact on your financial outcome.

Tax Loss Harvesting

If you have other investments that have incurred capital losses, strategically selling those assets can offset your capital gains. This technique, known as tax loss harvesting, helps reduce your overall tax liability. To understand the eligibility criteria and specific rules and limitations, it is crucial to consult with a tax professional.

1031 Exchange (for investment properties only)

Under Section 1031 of the Internal Revenue Code, you can defer paying capital gains tax by reinvesting the proceeds from the sale of one property into the purchase of another similar property. This strategy, commonly known as a 1031 exchange or like-kind exchange, allows you to postpone your capital gains tax liability and potentially expand your real estate portfolio.

Raleigh Mortgage Broker Logan Martini Bottom Line

Understanding capital gains tax is crucial for home sellers to navigate the intricacies of real estate transactions successfully. By comprehending the tax implications and employing strategic techniques to minimize your tax liability, you can optimize your financial outcome. Remember to consult professionals who can provide expert advice tailored to your specific situation since this article serves for informational purposes only and should not be considered legal, tax, or financial advice.

Given the complexities of capital gains tax and its implications, it is advisable to seek professional guidance from a qualified tax advisor. They can provide personalized advice based on your unique circumstances, ensuring compliance with tax regulations and helping you make the most informed decisions.

First-Time Homebuyers Tax Credit | Martini Mortgage Group

February 5, 2023 by Kevin Martini

Many first-time homebuyers in North Carolina may be eligible to save up to $2,000 a year with the Mortgage Credit Certificate (MCC) offered by the Martini Mortgage Group in partnership with North Carolina Housing and Finance Agency (NCHFA). This tax credit is not just for the first year, it is up to $2,000 every year as long as the home remains your primary residence.

A MCC allows eligible first-time homebuyers to receive a federal tax credit of 30% of the mortgage interest paid annually on existing homes (50% on new construction). If you are one of the many that will qualify, you could save up to $2,000 per year on your federal tax liability.

Martini Mortgage Podcast Special Episode 172: Tax Credit

Difference between Tax Credits and Tax Deductions

Understanding the difference between tax credits and tax deductions can help reduce your tax burden. A tax credit directly reduces the amount you owe to the government, while a tax deduction reduces your taxable income. With the MCC you are able to get both, assuming you itemize your tax return.

Imagine that after all eligible deductions are taken out of an individual’s income, they come to be taxed on $50,000. For example, a tax credit of $2,000 in this case would help reduce the tax liability from $5,000 (at a rate of 10%) to $3,000 – for a tax savings of $2,000 overall.

A tax credit directly reduces the amount of tax you owe dollar-for-dollar. So a $2,000 tax credit lowers your tax by $2,000.
Kevin Martini | Certified Mortgage Advisor and Raleigh Mortgage Broker

On the other hand, if this person were able to have their taxable income reduced from $50,000 to $47,500 through a tax deduction of $2,500 – their tax bill would be significantly lower at just $4,750 (from previously calculated: 10% x 50000 = 5000). Clearly understanding the difference between tax credits and tax deductions could result in significant savings for individuals or companies who are filing returns with the government.

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To learn more about tax benefits of owning a home and having a mortgage, check out this informative article called: Tax Benefits to Owning a Home and Having a Mortgage

Are you eligible?

You may be eligible if:

you are a first-time homebuyer or military veteran or buying in a targeted census tract
you meet the income limits and sales price limits
you are purchasing a home in North Carolina
you will occupy the home as your primary residence within 60-days of closing
you are a legal resident of the U.S.

To determine your eligibility and property eligibility, contact either Kevin Martini or Logan Martini with the Martini Mortgage Group.

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Tax Benefit to Owning a Home and Having a Mortgage | Martini Mortgage Group

January 26, 2023 by Kevin Martini

Are you among the many future and current homebuyers, excited with the prospect of purchasing a new property? While it’s certainly an exciting time for anyone, regardless of your experience level, it’s important to be educated about all aspects of becoming a homeowner – including understanding the potential of substantial tax benefits to owning a home and having a mortgage.

Did you know that homeowners that itemize tax deduction can deduct interest on an up to $750,000 of mortgage balances used to buy, build or improve a qualified home (see IRS Publication 936)?

With the mortgage interest tax deduction, the cost of borrowing may be lower than you think!

Most homebuyers and some current homeowners don’t understand and are surprised that their cost of borrowing is significantly reduced by this tax benefit.
Kevin Martini

As discussed, homeowners who itemize tax deductions can deduct the interest on up to $750,000 of mortgage balances used to buy, build or improve a qualified home. In the past few years, not as many homebuyers benefited from this because their total annual interest expense was lower than their standard deduction. In 2023, for married couples filing jointly for tax year 2023 the standard deduction will be $27,700. For single taxpayers and married individuals filing separately, the standard deduction is $13,850 for 2023

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IMPORTANT: Uncle Sam will never help you pay your rent however he will help you pay your mortgage vis-à-vis Home Mortgage Interest Deduction however to take advantage you must itemize your taxes not take the standard deduction.

The Kevin Martini 3 Step Process to Calculate Impact of Home Mortgage Interest Deduction

Determine Marginal Tax Rate
Know Mortgage Rate
Very Simple After-Tax Benefit Math

Determine Marginal Tax Rate

What is your marginal tax bracket? A marginal tax rate is the rate that applies to your last dollar of taxable income. In other words, the highest bracket homebuyer’s income falls into. At the time of publication, there are seven federal income tax brackets (i.e. 10%, 12%, 22%, 24%, 32%, 35% and 37%). Determine which bracket you are in based on how you file (i.e. a single filer or married filing jointly).

2023 Single Filers Tax Bracket (for illustration only)

2023 single filers tax bracket best raleigh mortgage broker

2023 Married Filing Jointly Tax Brackets (for illustration only)

2023 married filing jointly tax bracket best raleigh mortgage broker

Know Your Mortgage Rate

You need to know what your mortgage rate is not you Annual Percentage Rate (APR).

Very Simple ‘After-Tax Benefit’ Math

This step is very simple but does have 3 components

#1 Express the tax bracket as decimal

#1 Express the tax bracket as decimal … for illustration and example ONLY, let’s assume a 24% marginal tax bracket so in decimal form that is expressed as 0.24

#2 Subtract the decimal from the whole number one

#2 Subtract the decimal from the whole number one … for illustration and example ONLY, we would take one minus the marginal tax bracket expressed as a decimal hence, 1 – 0.24 = 0.76

#3 Multiple that number by the the current or actual mortgage rate

#3 Multiple that number by the the current or actual mortgage rate … for illustration and example ONLY. let’s use a mortgage rate of 6.5% so 6.5 x 0.76 = 4.94

In the example above, your mortgage rate is 6.5% and your are in a 24% tax bracket then your after-tax rate in 4.94% assuming that you itemize your taxes. That means, the Home Mortgage Interest Deduction saves you 1.56%!

While there are many exciting aspects to purchasing a new home, it is important to be educate about all aspects of becoming a homeowner – including understanding the potential of substantial tax benefits to owning a home and having a mortgage. With the mortgage interest tax deduction, the cost of borrowing may be lower than you think! If you’re considering homeownership, connect with either Kevin Martini or Logan Martini today so we can help you take advantage of this amazing opportunity.

Kevin Martini

Certified Mortgage Advisor | NMLS # 143962

Logan Martini

Senior Mortgage Strategist | NMLS #1591485

PLEASE NOTE: THIS ARTICLE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936. Also, this article is not an offer or commitment to lend you money, and it is not an advertisement for a specific mortgage or a specific interest ratehttp://2023 Raleigh Conforming Loan Limits