Selling your property and making a profit may sound exciting. But before you enjoy your gains, you need to understand the tax game that accompanies them. Many people, after selling their properties, ask us a common question: ‘When do we have to pay capital gains tax on real estate?’. The answer to this can vary for everyone, as it depends on several factors, such as the nature of the property and the period for which you owned it, etc. If you are also a homeowner and have concerns regarding capital gains tax, then this article is for you. Read on to get all your queries answered.
What Is Capital Gains Tax on Real Estate and When Do You Pay It?
Capital gains tax on real estate is the tax that you pay on the profit you receive upon selling an asset, particularly a house, land, rental property, etc. The gains may be short-term or long-term, depending on the period for which you owned your property. If you own your property for less than one year, you will be taxed the same as your regular income. However, if you owned the property for more than one year, the property sale tax rate would be considerably lower, e.g., 0%, 15%, or 20%. Generally, you have to pay capital gains tax on real estate when you file your taxes after selling your property.
Real Estate Capital Gains Exemption – All You Need to Know
Tax exemptions on real estate and their criteria are one of the most often asked questions by homeowners. Let us elaborate on it in simple terms for you. Real estate capital gains exemption means you can be exempt from paying tax upon selling your property if you:
- Sell your residential home
- Lived in the house for at least 2 years
- Lived in the house within the last 5 years
Upon meeting this criterion, you can exempt an amount of $250k if you are single, and $500k if you are married. Remember, you do not qualify for exemptions if you sell rental or investment properties.
Why Understanding Capital Gains Tax Matters
Understanding capital gains tax is crucial if you are a homeowner and are seeking to sell your property. Having a clear knowledge of capital gains tax allows you to know whether you will have to pay the taxes or not. It can also assist you in saving thousands of dollars from your hard-earned money by helping you plan smartly and sell only when the tax rate is at its lowest. Apart from this, understanding capital gains tax also helps you detect the real estate capital gains exemptions that you can qualify for.
How to Know When You Owe Capital Gains Tax on Real Estate
If you’re unsure about when you owe capital gains tax on real estate, we’re here to help. If you’re a homeowner selling your primary property that you’ve lived in for at least two of the last five years, you can exempt $250k to $500k from taxes. However, if you’re selling a rental or investment property, the tax applies to the total profit you make. You can determine your profit by adding the selling costs to the purchase price and then subtracting the selling amount. For example, it’s selling amount minus (P + SC). If you find this difficult, don’t hesitate to hire a tax professional.
Common Mistakes to Avoid
If you are a real estate owner, there are some common mistakes that you need to avoid when it comes to capital gains tax on real estate. Let us guide you.
Math Errors
Math errors are very common, particularly for people who are new to taxes. When you file for capital gains tax, make sure to subtract the selling costs and double-check for any other math errors.
Selling at the Wrong Time
Many people make the mistake of selling their property at times when the tax rate is at its highest. Never do this, and sell only during low-income years.
Not Having Important Documents
Having your important documents organized is the key to avoiding the hassle during tax filing. Make sure to have all your documents with you, particularly the receipts if your property was inherited or gifted.
Forgetting Exemptions
Always make sure to check if you qualify for exemptions when filing your capital gains tax on real estate. Forgetting it can prevent you from saving thousands of dollars.
Pro Tips for Homeowners to Reduce or Delay Capital Gains Tax
With years of experience as the most trusted tax group in the U.S, we have some pro tips for you if you want to reduce or delay your capital gains tax.
- Live in the house for at least 2 years during the last 5 years before you sell it
- Always sell your property in low-income years
- Sell each one of your properties in a different year
- Reduce taxable gains by keeping receipts for upgrades
- Hire a tax professional
How H&M Tax Helps You Navigate Capital Gains Tax on Real Estate
Navigating capital gains tax on real estate can be complex. Not seeking expert assistance can cause you to overlook exemptions, make calculation mistakes, and even sell your property at an inopportune time. At H&M Tax Group, we can be your reliable partner for managing capital gains taxes. By providing support throughout the year, not just during tax season, we help you sell your property at the right moment to minimize your tax burden. Additionally, we assist in keeping your documents organized so you stay IRS-compliant. Thousands of people across the U.S. trust us for precise and error-free tax preparation and filing. You can also count on us to make your tax experience smooth and stress-free.
H&M Tax Group is Your Comprehensive Tax Solution for All Your Tax Needs
- Expert Tax Professionals
- Certified CPAs
- Quality Of Service
- Affordable Rates
Conclusion
Capital gains tax on real estate is the tax that you pay on the profit you receive upon selling an asset, particularly a house, land, rental property, etc. Generally, you have to pay it when you file your taxes after selling your property. If navigating capital gains tax on real estate is challenging for you, rely on us, at H&M Tax Group, to provide you with a streamlined and unmatched tax experience.
