Capital Gains and Taxes
It’s January—time to start thinking about taxes again. Here is a summary of the current rules regarding capital gain on personal residences and investment property. Taxation on the two is very different.
Personal Residence
The current rule permits individuals to exclude up to $250,000 of capital gain from taxation, and married couples filing jointly to exclude up to $500,000. Any amount of gain above these limitations would be taxed. The exemption can be taken per transaction. That means that the determination of whether or not the gain will be taxed is made at the time of sale.What the homeowner does next—buy a more expensive home, buy a less expensive home, or not buy at all—has no impact on the determination. The current rule does have the limitation, however, that the property must have been used as the taxpayer’s principal residence for at least two of the past five years. If that is not the case, it is recommended that the homeowner speak with an accountant to determine what tax implications the sale of their property may have.For full details, see IRS publication 523 “Selling Your Home,” at www.irs.gov/publications.
Income or Investment Property
It’s a different story for investors. When investors sell property, they pay taxes on capital gain. However, it is possible to sell rental property or land and not pay any capital gain taxes. How? Through Internal Revenue Code 1031, which states: No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. Exchanging property for property allows the tax to be deferred to later years. This gives investors a wide range of investment freedom. IRC 1031 Tax Deferral can range from transactions involving the simple trade of two properties to complex, multi-property exchanges. Contact your financial advisor to determine the exchange strategy that is best suited for your situation.
Personal Residence
The current rule permits individuals to exclude up to $250,000 of capital gain from taxation, and married couples filing jointly to exclude up to $500,000. Any amount of gain above these limitations would be taxed. The exemption can be taken per transaction. That means that the determination of whether or not the gain will be taxed is made at the time of sale.What the homeowner does next—buy a more expensive home, buy a less expensive home, or not buy at all—has no impact on the determination. The current rule does have the limitation, however, that the property must have been used as the taxpayer’s principal residence for at least two of the past five years. If that is not the case, it is recommended that the homeowner speak with an accountant to determine what tax implications the sale of their property may have.For full details, see IRS publication 523 “Selling Your Home,” at www.irs.gov/publications.
Income or Investment Property
It’s a different story for investors. When investors sell property, they pay taxes on capital gain. However, it is possible to sell rental property or land and not pay any capital gain taxes. How? Through Internal Revenue Code 1031, which states: No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment. Exchanging property for property allows the tax to be deferred to later years. This gives investors a wide range of investment freedom. IRC 1031 Tax Deferral can range from transactions involving the simple trade of two properties to complex, multi-property exchanges. Contact your financial advisor to determine the exchange strategy that is best suited for your situation.
posted by Bob and Penny Hall | 10:02 AM
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