There are four things to you should know and understand about the Capital Gains Tax; what is the Capital Gains Tax, how is the Capital Gains Tax calculated, what is the the tax rate for Capital Gains Tax and the potential way to avoid or defer Capital Gain Tax. 

(IMPORTANT NOTE: This article is provided for information 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 523 for Primary Residence or IRS PUBLICATION 527 & IRS PUBLICATION 544 for Investment Properties.)

WHAT IS THE CAPITAL GAINS TAX?

The Capital Gains Tax is a tax paid upon selling a capital asset (e.g. stocks, bonds, jewelry, real estate) based on the amount the capital asset appreciated during the period of ownership of the capital asset.  

The Capital Gains Tax is a tax that you pay on the profit from the sale of any capital asset, including real estate.

Raleigh Mortgage Broker Kevin Martini

HOW DO YOU CALCULATE CAPITAL GAIN?

To understand the Capital Gains Tax, one must first understand “basis.” Basis, as it related to real estate, is the cost of buying, building, or improving a property. For illustration, if you paid $500,000 for a property, and spent $100,000 in improvements over time of ownership, your basis would be $600,000. If you sell the property for $1,000,000 and pay $80,000 in closing costs, your profit on the sale of the property would be $320,000. You would then need to pay capital gains taxes on that profit.

WHAT IS THE CAPITAL GAINS TAX RATE?

The long-term Capital Gains tax rate for the 2022 tax year are 0%. 15% or 20% of the profit.  For most tax payers, the Federal Capital Gains Tax rate is currently 15% however it is 0% if you’re in the lowest income tax bracket and 20% if you’re in the highest income tax bracket. 

In the example previously mentioned (i.e. you sold a property for $1,000,000 and your cost basis was $,680,000 and you profited $320,000) you’d need to pay $64,000 in taxes if your Capital Gains Tax rate is 20% or $48,000 if your Capital Gains Tax rate is 15%.  In addition, you may also have to pay a state tax and a 3.8% federal Net Investment Income Tax (NIIT). Again, this article is provided for information 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.

IS THERE ANY WAY TO AVOID OR DEFER PAYING THE TAX?

Perhaps. If the property is your primary residence, and you’ve lived there for 2 out of the past 5 years, you may be able to exclude some or all of the capital gain from taxes with what is called a Principal Residence Exclusion. With a Principal Residence Exclusion, a certain portion of the capital gain is excluded from tax. In the 2022 tax year, married couples can exclude $500,000 of capital gain from tax. Individuals or married couples filing a separate tax return can exclude $250,000 of gain from tax. 

In the example mentioned previously (i.e. you sold a property for $1,000,000 and your cost basis was $,680,000 and you profited $320,000), the entire $320,000 would be excluded from tax if this was your primary home and if you were married, filing a joint tax return. This means that you could save up to $76,160 by using this exclusion (no capital gains tax and no 3.8% NIIT)! 

If the property is an investment property, you may be able to defer the tax by using a 1031 Exchange. With a 1031 Exchange, A 1031 Exchange you may be able to defer the capital gains tax on the sale of investment property if you roll over all the sales proceeds into a new investment property.

1031 Exchanges are ideal for long-term real estate investors

Raleigh Mortgage Broker Kevin Martini

GET MORTGAGE HELP FROM THE MARTINI MORTGAGE GROUP

If you have additional questions on Capital Gains Tax or anything mortgage, let us connect. Unlike other mortgage companies, the Martini Mortgage Group takes a fiduciary approach. That means that the advice and products we offer exist to serve your interests ahead of ours. Give us a call: (919) 238-4934