Capital gains tax is one of those topics that can easily get confusing and having misconceptions about the subject can lead to unpleasant surprises come tax time. To avoid unnecessary problems, lets clarify what capital gains tax is and what you should know about it as a homeowner, a house flipper or as someone who will eventually sell their property.
1. What is a Capital Gains Tax?
A capital gains tax is a type of tax levied on capital gains incurred by individuals and corporations. Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price .
Capital gains taxes are only triggered when an asset is realized (sold), not while it is held by an investor. For example, an investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold.
2. Making a profit off a home sale is ok, but understand the limitations
Buying a home is considered an investment and a home is typically supposed to be valued higher when its sold vs when it was originally acquired. This is one of the perks of owning a home —the investment’s profit potential. However, there is limitations on how much profit can be made off the sale of a home. As of now, a person can keep up to $500,000 of each home sale profit tax-free, if they’re married. If they’re single, then it’s up to $250,000 tax-free.
3.) All home sales are not treated equally
A primary residence, a vacation home and a home bought to flip and sell are not the same when it comes to taxes. The taxes will differ between a house flipper and a homeowner. Someone who flips a home for profit will not be taxed the same when they sell the property compared to someone who actually resides in their home prior to it’s sale. This is because the homeowner must have used the home as the primary residence for two out of the five years preceding the home’s sale. Otherwise, profit on homes sale is taxed as capital gains.
If a person flips houses on a regular basis, then it’s a different story completely because the homes are then considered inventory, not capital assets. With inventory sales, any profit earned is considered income and is taxable as such with rates ranging from 10% to 39% depending on that person’s financial picture.
If you have any questions about selling your home or the tax implications of buying, flipping or selling a home, Contact Us here at Lendem Financial . One of our knowledgeable WI mortgage lenders can get you the information you need to avoid any unpleasant tax issues that can arise with buying and selling real estate.
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