How Much Is Capital Gains Tax on Real Estate? What Homeowners Need to Know to Avoid It

I know…tax season is over (hopefully you got yours done already!!)  But this question about CAPTIAL GAINS TAX is a question I get on a regular  basis from my clients —  about what it is and does it apply to me?  This was an article I recently sent out in my monthly ‘paper’ newsletter (I know so  old school) to my mailing list.  It was super helpful for me to understand what it actually is and how it works — I hope you find it as informative.  

 

What is capital gains tax? This is a prime question that might creep up when you sell your home for more than you paid for it. That’s good news for you, but the downside is, you may have to pay taxes on those profits in the form of capital gains tax. Yep, just as you pay income tax and sales tax, home sale profits are subject to taxation, too.

Complicating matters is the new Tax Cuts and Jobs Act, which is changing the rules. So if there’s ever a time to brush up on all things capital gains, it’s right now. Here’s what you need to know.

What is capital gains tax—and who pays it?

In a nutshell, capital gains tax is a duty levied on property and possessions you’ve held onto for more than a year that you sell for a profit—including your home.

The IRS gives each person, no matter how much the person earns, a $250,000 tax-free exemption for a primary residence.

“So if you and your spouse buy your home for $100,000, and years later sell for up to $600,000, you won’t owe any capital gains tax,” says New York attorney Anthony S. Park. However, you do have to meet specific requirements to claim this exclusion:

  • The home must be your primary residence.
  • You must have owned the home for at least two years.
  • You must have lived in the home for at least two of the past five years.

If you don’t meet all these requirements, you may be able to take a partial exclusion for capital gains tax. For more information, consult a tax adviser or IRS Publication 523.

How much capital gains tax will you have to pay?

For capital gains over that $250,000-per-person exemption, just how much of a bite will Uncle Sam take out of your real estate sale? In the past, that depended on your tax bracket. Under the new tax law, capital gains rates are now based on your income, explains Park. Let’s break it down.

Single Filer

Married Filing Jointly

Head of Household Capitol Gains Tax Percentage
Earning Less Than $39,375 $78,750 $52,750 0%
Earning Between $39,376 – $434,550 $78,751 – $488,850 $52,751 – $461,700 15%
Earning More Than $434,550+ $488,850+ $461,700+ 20%

Don’t forget, your state may have its own capital gains tax. And very high earners may owe an additional 3.8% net investment income tax.

Do home improvements reduce capital gains tax?

How much capital gains tax you’ll pay may also be reduced because of home
improvements you’ve made. The money you spent on any home improvements—such as replacing the roof, building a deck, replacing the flooring, or
finishing a basement—can be added to the initial price of your home to give you the adjusted cost basis of your home.

For example, if you purchased your home for $200,000 in 1990 and sold it for $550,000, but over the past 29 years have spent $100,000 on home improvements, that $100,000 would be subtracted from the sales price of your home this year. Instead of owing capital gains taxes on the $350,000 profit from the sale, you would owe taxes on $250,000. In that case, you’d meet the requirements for a capital gains tax exclusion and owe nothing.

Make sure to save receipts of any renovations and repairs, since they can save you big-time come tax filing season.

How capital gains tax works on inherited homes

What if you’re selling a home you’ve inherited from family members who’ve passed away? The IRS also gives a “free step-up in basis” when you inherit a family house. But what does that mean?

Let’s say Mom and Dad bought the family home years ago for $100,000, and it’s worth $1 million when they die and leave it to you. When you sell, your purchase price (or “basis”) is not the $100,000 your folks paid, but instead the $1 million it’s worth on their date of death.

How to avoid capital gains tax as a real estate investor

If the home you’re selling is a second home (i.e., vacation home) rather than your primary residence, avoiding capital gains tax is a bit more complicated. But it’s still possible. The best way to
avoid a capital gains tax if you’re an investor is by doing a 1031
exchange. This allows you to sell your property and buy another one without recognizing any potential gain.

“In essence, you’re swapping one investment asset for another,” White says. He cautions, however, that there are very strict rules regarding timelines and guidelines with this transaction, so be sure to check them with an accountant.

If you’re opting out of the rental property investment business and putting your money in another venture, then you’ll owe the capital gains taxes on the profit.

Source: https://bit.ly/2CDrl5n

Posted on April 24, 2019 at 11:01 pm
Denise Perkins | Category: Denise Perkins, Helpful Home Tips, Home Sweet Home, In the News, Market Stats, Uncategorized | Tagged , , , , , , , , , , , , , , ,

Housing Market to Spring forward!

Many potential sellers believe that waiting until Spring is in their best interest. Traditionally, they would have been right.

Buyer demand has seasonality to it. Usually, this falls off in the winter months, especially in areas of the country impacted by arctic conditions, although that has not been the case this year!

Demand for housing has remained strong as mortgage rates have remained near historic lows. Even with an increase in rates forecasted for 2019, buyers are still able to lock in an affordable monthly payment. Buyers are increasingly jumping off the fence and into the market to secure a lower rate.

Those who act quickly and list now, before a flood of increased competition, will benefit from additional exposure to buyers.

Bottom Line: If you are planning on selling your home in 2019, contact me and we can evaluate the opportunities in your market.

Posted on April 17, 2019 at 5:24 pm
Denise Perkins | Category: Denise Perkins | Tagged , , , , , , , , , ,

Return on Investment

Return on Investment

If you’re considering having some work done on your house, it’s wise to consider making the right choices. We’ve all seen the HGTV shows that teach us a $20 lamp can yield a $250 improvement in sales price or something silly like that, but if you’re like many of my clients, you’re probably left more confused by these sorts of home improvement shows than you are left informed.

Bottom line? Investing in your home is (almost) always a smart choice. If you’re on the fence about doing it, just do it. But if your goal is getting the most “bang for your buck” with your improvements, there are some things that you should know before breaking out the Home Depot charge card.

Image result for home remodel

For example…

We all know that improving a kitchen or a bathroom is the best way to turn a $500 remodel into a $5,000 value, right? But did you know that you’ll actually realize a better return on investment if you do a mid-level upgrade versus a luxury model upgrade?

If you check out this graph, compiled by Redmodel.hw.net, you’ll see that a midline bathroom upgraded yielded an 87.7% cost recoup, while an upscale remodel yielded just a 60.8% recoup on costs. Pretty impressive right?

Turns out, you don’t have to break the bank on your home project to get the best bang for your buck.

The trend continues when you look at a major kitchen remodel. A midline upgrade, defined as one costing in the ballpark of about $70,000, yielded an average 62% cost recoup. Taking a look at an upscale major kitchen remodel, think more in the $125k range, only yielded a 56% recoup on costs.

The trend continues through almost every major area of home improvement, including additions of master suites and bathroom additions.

So, what areas of home improvement should be done at an upscale level?

There are some parts of the home that deserve the extra bang for your buck. The addition of a grand entryway, for example, can recoup 82% of your costs, making it one of the smartest improvements that you can make. Other areas where you should consider an upscale improvement include window replacement. No matter if you choose wood (81% recoup on costs) or vinyl (85% recoup on project costs), you’ll realize a great home improvement by going upscale with windows.

Midscale? Upscale? Just tell me what to do first.

Still confused? Don’t worry, I get it. There are a lot of numbers flying at you right now. Most people can only budget for one major home improvement project at a time, so if you’re staring down a long list of “maybes” and only have time or budget for one improvement, let’s cut to the chase. . .

Are there any home improvements where you can recoup all of your investment?
Are there any improvements that will actually yield a pure profit?

The good news here is that, yes, Virginia, there is a home-improvement Santa Claus. If you’re only going to tackle one project- make it an upscale garage door improvement. Those babies can realize a 120% return on your investment. That means it’s not only “free,” but it will make you money when it is time to sell your home. Since even the most upscale of garage door replacements can be done for under $5,000, this is a smart investment that you should be making right away.

Another sure-fire bet is a midrange stone veneer upgrade to your siding. These are very trendy right now, and reports are showing that this improvement will realize about 120% return on investment. Considering the average project cost for this is generally under ten grand, this is a smart investment.

Finally, consider upgrading your front door to a steel door. At around $1,500, this project has a 95% recoup of costs, making it almost free. Another trending improvement is the addition of a wood deck.

What to put on hold
While it would be nice to do all the upgrades at once, that’s not realistic. According to the reviews I’ve been monitoring, the following improvements have the lowest recoup of investment potential and can safely be saved for another time.

Upscale master suite addition, 51% ROI
Midrange backyard patio addition, 51% ROI
Major, upscale kitchen remodel, 56% ROI
Upscale bathroom addition, 60% ROI
Midrange kitchen remodel, 62% ROI
Upscale bathroom remodel, 62% ROI

Image result for home remodel

Still feel like you could use some home improvement guidance?
The truth is that I find all of this really interesting, and would love to speak with you about it! If you’re confused on where to get started, how to budget, or who to hire to do the work – I’ve got you covered. Feel free to email me or call me and we can schedule a time to talk about your unique home and how best to improve it for your future resale value.

And if you’ve just completed a major home project, I want to see it! Be sure to share it with me on social media!

 

Sources:
http://www.remodeling.hw.net/cost-vs-value/2018/pacific/
https://s3.amazonaws.com/HW_Assets/CVV_Assets/2018/Consumer/seattlewa.pdf

Picture Sources:
www.reedsecurity.com
www.ohiohomedoctorremodeling.com

 

Posted on November 12, 2018 at 6:39 pm
Denise Perkins | Category: Helpful Home Tips, Home Sweet Home | Tagged , , , , ,