The recent run up in home prices has resulted in many homeowners realizing significant gains in home equity. This has been quite the reversal from the time period between 2008 to 2012 when many homeowners were selling at a loss due to the economic downturn. Now more than ever, homeowners must be cognizant of the capital gain tax implications when selling their real estate at a profit. For this article, we will focus on short-term and long-term capital gains taxes on investment properties. For tax implications on selling your primary residence, please see our previous article here. We explain short-term and long-term capital gains in more detail below.
What are capital gains taxes?
Put simply, capital gains taxes are taxes levied on profit from the sale of property or an investment. Upon selling a home or other asset at a profit, your profits become realized and become taxable. The length of time that you own a property or asset prior to selling it at a profit will dictate whether your gains will be considered short-term or long-term. Simply put, if you owned a home for less than a year and then sold it at a profit, your gains would be taxed at your ordinary income level. (This would be equivalent to your tax rate for your primary profession/income.) For example, if you are currently in the 25% tax bracket, then your profits from the home sale would be taxed at the same level.
As for property that you have owned for longer than one year, this would be considered a long-term gain. Therefore, you would be responsible for long-term capital gains taxes. The long-term capital gains tax rates are 0%, 15% or 20%, depending on your income. In the event that you also had a capital loss in the same year, the gains from selling your property would be offset by these losses. (A capital loss is when you sell an asset for less than the sales price.)
The IRS considers a home sale to be an event that triggers taxable income. During your closing, your attorney or closing agent will likely have you sign a form called the 1099-s. Basically, this form will ask you whether the sale of the property is a taxable event or not. Signing this form will alert the IRS that a taxable event is occurring. Therefore, it is critically important that you are truthful about the transaction. The alternative would likely result in a tax audit. Do you have questions about real estate investing? Contact Natasha at Live South Florida Realty, Inc. today!
At Live South Florida Realty, Inc. we have assisted many clients with their real estate needs. Are you looking to buy or sell a property in South Florida? Now more than ever, it is critical to have a qualified real estate team and the proper search tools behind you. Live South Florida Realty, Inc., has been a leader in the South Florida market for many years. Let our team of professionals assist you with buying or selling your piece of paradise today! In addition, our recently launched “Florida Home Search” app is now available on the Apple App Store and Google Play Store. With real-time MLS feeds, this app lets you set your own alerts to notify you as soon as a property meeting your needs hits the market. Furthermore, it will also let you know of recent closed sales in your area so that you may be even more educated on the market. Be sure to download this app for your smartphone or tablet today!