Congratulations! RGH Realty #1, Inc. has just sold your home. Did you net a profit? If so, be aware that this profit may be subject to capital gains tax. This means the your home (a capital asset) and the profit made (gain), may be taxable.
The Taxpayer Relief Act of 1997 changed the tax laws for capital gains on primary residences. Years ago, when selling your home, the tax could be delayed on profits if another home was purchased within two years of selling (there were restrictions on the price of the home you bought).
To receive capital gains tax relief today, you don't have to purchase another home you only pay taxes on any gains over $250,000 ($500,000, if filing jointly).
What is a "Capital Gains" all about?
Capital gains is the gain received upon the sale of a capital asset.
By deducting the adjusted cost basis from the net sales price computes the Gain.
A "preferential" capital gains tax rate affects gains on sales of certain capital assets that are held for specific holding periods. If not held for the specific holding periods, the tax is computed using the taxpayer's regular income tax rate.
When losses occur on the sale of a personal residence ExampleExample House House and or personal use property there are no deductibles.
Long - Term Capital Gain
Currently, federal tax rate of capital gain income of assets held for over one year is 15%. This rate will drop 5% for taxpayers in the lowest brackets (effective 5/06/03).
Long term capital gain is to be distinguished from earned income and passive income, which are taxed at the taxpayer's marginal tax rate up to 35%.
Example
House #1
Purchase Price
$35,000
1968
Sales Price
$180,000
1977
Gain
$135,000
House #2
Purchase Price
205,000
1977
Gain
(135,000)
(old roll-over rules)
Adjusted Basis
$70,000
Sales Price
$310,000
1995
Gain
250,000
(old roll-over rules)
House #3
Purchase
$435,000
1995
Gain
($245,000)
Adjusted Basis
$190,000
Sales Price
$925,000
1998
Gain
$735,000
Total Gain
$735,000
Exclusion
($500,000)
New Tax Law
Taxable Gain
$235,000
Capital Gain Rate
20%
Federal Tax Due
$47,000
State taxes may be due.
Disclaimer: These are general guidelines that provide information only. Other IRS rules may apply. Consult with an accountant, CPA or tax attorney for professional advise.
What is a "Capital Gains" all about?