Tax Implication on Sales
Gaining profit of home sale is an exciting proposition regardless of the matter that gains comes because you made some renovations in the House or property value swings to sky just after you move into the house.
But the threat of taxes which we assure is a very real threat has the ability to suck out all the excitement from the opportunity. These taxes are also known as capital gain tax.
Luckily tax payer relief act of 1997 helped many homeowners which allow them to hold on to gains which they earned by selling their home. But, since tax is involved there are lot of exceptions and loopholes which one needs to be aware of. So, let’s take a look at few misconceptions involved in capital gains.
All sales are treated equally is one common misconception related to capital gains. For house flippers it is not the case. In order to receive the best tax treatment it is necessary that they have used the house as Primary Residence for at least 2 years out of five prior to sale. In case the home is was not the primary residence then the profit will be taxed as capital gains.
But, those who flip houses on regular basis their homes are considered as an inventory and profit earned is taxed as income.
Capital gain is taxed as 15% for most people but 20% for the top tax persons but if the gains are taxed as income then rates could range from 10% to 39.6%.
Exemption limits: Filing married vs. single
If you are married then you are eligible for tax-free home sale profit up to $500,000but this can be tricky for the newly married couple because it still requires that both parties must have lived together for at least two years prior to the sale. Also, if one partner sold the home within last two year and cashed the exemptions then the couple will have to wait until the 2 year window passes away.
Home type: Primary residence v/s vacation home or rental property
In case you have a second home which you want to sell after living there for two years it won’t be treated as a primary residence for tax purposes. Instead, when the time will come you will be prorated for the tax based on the number of years the property was rented or used as a second home.
Profit: Large sale v/s small sale
The more the house is sold for the more will be the tax is another misconception. For tax considerations, it does not depend on the home sale price but is based on the profit you make from the sale. In fact you can sale the house for $5 million and don’t owe a penny because you didn’t make more than the allowed exemption amount on the sale of the house.
Tax related matters can be tricky and therefore, it is advised to consult a tax professional before making any big moves.
Give a try to see for yourself and utilize its migration package before the time expires.
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