Overview
Paying taxes is an inevitable part of life, and selling real estate properties and having to pay for your capital gains is no different. It is therefore important for you to understand how much you should expect to pay when you want to sell your real estate property so you will be ready to part with the amount that should be set aside for taxes. There are several key concepts you need to understand. The first is that the amount of tax you need to pay is highly dependent on your current income level and the length of time you have held the property you want to sell.
Tax rates
There are different tax rates for the short term capital gain and the long term capital gain. Basically, the short term capital gain will be taxed just like other kinds of income so generally, you need to pay more taxes for short term capital gains and long term capital gains. On the other hand, long term capital gains are special rates that are set to provide tax shelter to individuals who want to sell their properties. There have been a lot of changes in recent years that you need to be aware of in long term capital gains.
For example, there were some key developments in 1998 that lowered the long term tax rates for people both from the lower income and the higher income tax brackets. From the maximum tax rate of 28% in 1997 for a holding period of 18 months, the rate was lowered to 20% with a holding period of one year. Then this rate was further lowered to 15% in 2003 when Congress passed a law to make this endeavor possible. You should also note that this rate can be as low as 5% for people in the lower income tax bracket. In some cases, they do not even have to pay taxes if they suffered losses.
However, the losses are subject to different conditions. For example, an individual’s capital gain or loss is first netted. This means that the short term gains and the short term losses are netted against each other and the long term gains and the long term losses are also netted against each other. After this procedure, the short term net gain/loss and long term gain/loss are also netted against each other to be able to know whether you had experienced an overall gain or loss during the year.
If you had suffered a capital loss, it is possible to deduct it from your regular income to pay a lesser amount of tax. You should note though, that this is only deductible of up to $3000 each year although the loss can be carried forward continuously. There are many other things you need to understand about real estate capital gains tax but aside from knowing about the current laws, it is also essential for you to know the tax laws that will be implemented in the near future so that you will not pay more taxes than you should.