Welcome to the world where tax and real estate are both combined and tricky to navigate. It doesn’t always have to be like that, though, especially when you understand what you are getting yourself into. We could run through all the numbers and rates to get technical. However, let’s focus on the details that may or may not apply to you. Also, taxes differ for each situation and person. Let’s explore some general overviews and then guide you in the direction of understanding what capital gains tax is on real estate.
What is Capital Gains Tax?
For starters, do you know what is a capital gains tax? A capital gains tax is money you owe to the government as part of selling off an asset. If you plan to sell your home now or in the future, you will want to pay close attention to how this impacts your potential sale. Every bit of tax preparation and planning will help you save plenty of time and stress at the end of it all. Assets can consist of more than just real estate. However, we will focus on how large and standard real estate sales have become.
What Has Changed Since 2021?
Just as with everything else when it comes to taxes, filing status impacts the gains tax. In the world of real estate, so does the sale price of the asset, or in this case, the home.
So, what has changed since 2021? For one, inflation has raised the cost of living and income thresholds. You can see the tax tables for both 2021 and 2022 here. The government will release tax rates for 2023 in late October or early November this year once the current inflation rate has been assessed. While you can expect things to remain close to constant over time, don’t rely on outdated information to prepare for the future.
Long-Term and Short-Term Tax Rates
Long-term tax rates are applicable on any assets sold that were owned for longer than one year, and the rate, again, depends on your filing status, exemptions qualifications, and income. The longer you own and live in your primary home before the sale, the better your tax exclusions. Short-term tax rates are the opposite: they are applicable on any assets sold that were owned for less than one year. Most talk of tax rates will apply to the sale of a primary residence, but there are many types of real estate sales and all of them have different ways the capital gains tax will impact those sales. Let’s take a closer look at the most common types of sales.
Rental Home
- Rental properties are a little more complicated because the tax exemptions and rates depend on how long you have owned them. Other factors that also make an impact are what you have claimed on it in terms of depreciation deductions, and if it’s a long- or short-term capital gain or loss.
Vacation Home
- Selling a vacation home or non-primary residence is not subject to the same exclusionary benefits you receive with the sale of your primary home. A vacation home will be taxed to the maximum rates as indicated by the year’s tax table of which you make the sale.
Short Sale of a Primary Home
- Short sales usually occur in the instance of financial hardship. These tax implications will depend on whether the short sale and house debt are in recourse or nonrecourse.
Actions to Take if a Natural Disaster Destroys Your Home
Destruction is also tricky because it depends on your insurance coverage and the amount of money you get from your insurance company as support. What’s the catch? It has to be declared a federal disaster to count, and there are some ways around the tax. For example, buying a new home within four years of your insurance payout.
Saddock Advisory is Here to Help
There’s a lot of information to know when it comes to capital gains tax on real estate. Therefore, we hope you have learned something and are thinking about how to make your first or next house sale as efficient as possible regarding the tax realm. Consulting with tax advisors or tax planning services will be your best bet given their professional experience and expertise.
Saddock Advisory is here to help! You don’t have to navigate the rules of capital gains taxes alone. Our tax expert tax advisors can provide you with the necessary information and guidance regarding taxes and real estate.
Contact us now to get started!
