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How does the Capital Gains Tax work by Kevin Martini

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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

3 Kevin Martini Things That Could Impact Raleigh Real Estate 

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The question that is top of mind for many, that either one whom owns real estate in the Raleigh area or one whom want own real estate in Raleigh, North Carolina area, is if the perceived real estate pivot is an opportunity or a challenge.  According to Raleigh mortgage broker and Certified Mortgage Advisor Kevin Martini; “Right now there are 3 pivots in today’s housing market that could impact current homeowners and homebuyers.  They are inventory, price growth and interest rates”. 

INCREASE IN HOUSING INVENTORY

The number of houses available for sale in most markets across the U.S. and in Raleigh area has increased from the ultra-low levels of the past few years however there is still an undersupply of home for sale on the aggregate. The perception that we have shifted to a full blown buyer’s market is not correct.  The slight increase in inventory and days-on-market has provided some homebuyers with negotiating power. 

MORE TRADITIONAL HOUSE PRICE GROWTH

House values have risen by 20%+ per year in many markets throughout the pandemic. It is unrealistic to expect that this hose price growth will  continue moving forward. The growth of house prices is slowing to more of a traditional pace versus the pandemic pace, house price growth is forecasted to normalize.  Sure normalization means a deceleration form pandemic levels but declaration does not means depreciation.

FLUCTUATING HOME LOAN INTEREST RATES

Raleigh mortgage rates have risen by over 2% this year in response to high inflation and the removal of the Federal Reserve’s pandemic-era stimulus programs. This means that mortgage payments have increased for potential buyers however since there are higher weekly wages, the playing flied has remained level for keeping home affordable.

On the topic of affordability, check out episode 153 of the Martini Mortgage Podcast which highlights how higher home prices and fluctuating mortgage rates are not really impacting home affordability.

RALEIGH MORTGAGE BROKER AND CERTIFIED MORTGAGE ADVISOR KEVIN MARTINI

Even with the recent perceived pivot in the real estate arena, if you are still considering to make a move, it may be time to pick up your home search back up today.  Rember, it should always be home loan first and then go find your home. If you have questions about the increase in housing inventory, traditional house price growth or about the fluctuating home loan interest rates contact Kevin Martini by dialing (919) 238-4934. 

What is depreciation? 

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If you are thinking of buying an investment property in Raleigh, North Carolina or anywhere in the U.S for that matter, a powerful word that you need to know is depreciation. In fact, in the real estate investment space, there are 3 thing you need to know about deprecation. 

What is depreciation?

A tax deduction that real estate investors can take for the value of improvements on real estate investment property is called depreciation. According to the IRS Publication 946 (2021),  depreciation “… is an allowance for the wear and tear, deterioration, or obsolescence of the property.” One may not depreciate the value of the land since depreciation is only applicable to the value of the improvements on the land. To deprecate a property, you must own it, it must be used in your business or as an income-producing activity, it must have a useable life and that useable life must be greater than 1-year.

How is depreciation calculated?

For illustration only, if an investment property is worth $500,000, and the land is worth $200,000, you can get a tax deduction for $300,000 when you buy the property. Now you cannot take the $300,000 tax deduction all at once in 1-year however you can spread it out over 27.5-years for residential properties.

How can you benefit from depreciation? 

In the simplest form, deprecation allows you to take a ‘paper-loss’ when you purchase and/or own real estate rental property.  This ‘paper-loss’ shelters part of your rental income from taxes. IMPORTANT: depreciation will eventually need to be paid back when you sell the real estate rental property through ‘depreciation recapture’ (NOTE: there is a way to defer ‘deprecation recapture’ by using a 1031 exchange.  

This article has been written by Certified Mortgage Advisor and Raleigh mortgage broker Kevin Martini 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 946 and IRS Publication 527.

Contact Kevin Martini

Kevin Martini | NMLS 143962 | Certified Mortgage Advisor and Producing Branch Manager | Martini Mortgage Group at PCL Financial Group (powered by Celebrity Home Loans, LLC NMLS 227765) | 507 N Blount St Raleigh, NC 27604 | (919) 238-4934 | www.MartiniMortgageGroup.com | [email protected] | nmlsconsumeraccess.org |Equal Housing Lender

This article has been written by Certified Mortgage Advisor and Raleigh mortgage broker Kevin Martini 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 946 and IRS Publication 527.