As a stock investor, or as someone who has had money in a mutual fund, you already know that investments you’ve held for longer than a year and sold for a profit are subject to lower tax rates – long-term capital gains taxes – providing you have the necessary records from the time of acquisition to the end of the sale process. If you are in the upper-income bracket, you could owe the maximum 20 percent rate and, if you are in the 25, 28 or 33 percent brackets, you are looking at a rate of 15 percent leveraged on your profits. You might be aware that these favorable rates extend to selling your home, but there are a lot of other types of asset purchases that might be eligible for these more advantageous rates, too. It certainly is worth consulting your tax professional to find out if you can keep more money in your pocket.
Selling Your Home
The IRS considers any profit you make selling your home to be a capital gain and does provide some fairly generous tax breaks.
- No tax on the first $250,000 you make ($500,000 if you file as married filing jointly) providing you have owned the home for two years and lived in this home as your primary residence for two years out of the last five, and have not taken this tax break for any other home sale in the past two years.
- Additional expenses – closing costs, real estate taxes, major home improvements and real estate fees – may be subtracted from the profit made on the house sale, thus lowering your potential capital gains taxes.
You don’t get the $250,000 exemption that you get on your primary residence, but the same rules on deducting expenses – buying, improving and maintaining – apply. If you sell an investment property, any loss can be claimed as a capital loss on your taxes. Consult a tax professional because there are several complex issues that should be considered.
Other asset sales that might qualify for the more favorable capital-gains tax rates include the following, which are frequently overlooked.
- Time-share interests
- Country club memberships
- Personal property, such as jewelry or furniture
- Contract rights for a license
- An ownership interest in a partnership or a limited liability company
There are other types of payment (profits) arising from contractual business arrangements that might be eligible for this type of tax treatment, too. If you have been involved in anything involving compensation for leases, payments for intellectual property or for land owned by your business, explore the tax implications with your professional tax advisor to determine your best approach.
Capital losses can be used to reduce your tax bill in some situations. If you have no capital gains to offset your losses, you can deduct your capital losses from your income taxes. You can deduct $3,000 ($1,500 if you are married and file a separate return) of capital losses per year and subtract it from your income. If your losses exceed $3,000, you can roll the remainder over into next year’s tax return (up to $3,000) and deduct it from that year’s taxes.
Getting the most out of favorable capital gains tax rates requires you to keep good records and to work with your tax professional to leverage every opportunity. Time is running out, but there’s still time for last minute recalculations or to seek an extension.