Considerations Regarding Capital Gains Tax
You probably already know about capital gains tax – what it is, and how much you can expect to pay based on certain criteria. Today, we’ll look at some considerations that must be made regarding capital gains tax and how to avoid possibly expensive mistakes.
The Personal Residence Exclusion
When you sell your personal residence, you may exclude up to $250,000 of gain on that sale. If you’re married, you can exclude even more – $500,000. In order to qualify for this exclusion, you (or your spouse) must have lived in and owned the home for at least two of the five years before you sold it. Those two years don’t have to be consecutive, though, which is helpful if you moved out for a while and rented it while you were gone. Additionally, it’s important to note that for people who live in nursing homes, the two-year requirement is reduced to only one year.
The Carry-Over Basis
If you give property (such as a family heirloom or a piece of real estate) to another person, they receive it with your basis. For example, if your parents bought a vacation home decades ago and paid $25,000 for it, but its market value has since risen to $500,000, then if they give it to you, your basis will be the same as theirs — $25,000. That means that if you sell it, your gain will be $475,000, and you won’t have a personal residence exclusion unless you lived there for two out of the five years before you sold it. You’re looking at a combined state and federal tax of $118,750.
The Step-Up in Basis
Sometimes, though, the basis of an inherited property may be adjusted on the date of death. Going back to our vacation home example, if you inherited it from your parents instead of them gifting it to you, the basis would adjust to $500,000 – which could potentially save you $118,750 if you sell it. However, it may be subject to estate tax, which would need to be paid within 9 months of your parents’ death – as opposed to capital gains tax, which wouldn’t be due until you sold the property, if you ever did.
Offsetting Losses
During the tax year, if you sold a property and realized capital gain through that sale, it is possible to offset it with capital losses. You could sell stock that has decreased in value, or even carry over a loss from one year to the next in order to offset some capital gains.
Questions about Capital Gains Tax? Call Bradford & Holliman!
When it comes to your estate and taxes, we’re the experts, and we’re ready to help you navigate this sometimes confusing world. Contact us today for more information on capital gains tax, estate planning, and more!