It’s tax time. Don’t let the dreaded capital gains tax cause you dread. Learn more about it right here!
Your taxes are due. April 15th is just two weeks away. Are you ready? If you sold your Brooklyn home last year, there are a few things you should know about capital gains and your home sale.
High-fives to you! You made a positive financial move in 2015 and walked away with a profit on your Brooklyn home sale. Now it’s tax time and the dreaded capital gains tax threatens to burst your bubble of excitement. Maybe this will help.
What are capital gains?
According to nystax.net, capital gains are the profits that occur as a result of the difference between selling and purchasing price, on which sellers of a primary residence are taxed.
First, know this. The rules aren’t as rigid as they used to be, and there are plenty of exceptions and loopholes you should be aware of. Second, talk with your accountant in Brooklyn, and ask these important tax questions to help avoid any confusion on April 15. See 10 Money-Saving Tax Questions Sellers Need to Ask.
Knowledge is power. Learning about capital gains on a positive home sale in Brooklyn will save you money. On that note, let’s break down 4 misconceptions you may have about capital gains and your Brooklyn home sale.
- All Brooklyn home sales are not treated equally
Flipper and homeowner sales are taxed differently. A homeowner who has uses their home as their primary residence for two out of the five years before it is sold will receive better tax treatment on their home sale profit. A flipper doesn’t usually use a home as a primary residence for two out of the five years before it is sold, so profit on the sale is taxed as capital gains. If you happen to flip houses regularly, your home purchases are inventory, not capital assets. The profit from these home sales are taxed as income. For most people, long-term capital gains tax is 15%, but if you happen to be in the top tax brackets, it is 20%. But, if the profits earned are considered taxable income, tax rates could range between 10% and 39.6% depending on the rest of your income. Homeowners can avoid the tax by rolling profits over into the next home they purchase. Those who flip houses can’t.
- What matters if you’re married or single
Thankfully, the once-in-a-lifetime tax exemption of $125,000, was done away with by the Taxpayer Relief Act, but limits still exist for claiming tax exemptions. If you’re married, you can claim a tax-free exemption up to $500,000 from the sale of each home. If you’re single, you can claim a tax-free exemption up to $250,000 from the sale of each home. Claiming this tax-free exemption can get a bit sticky for newly married couples though. Let’s say one person owned a house for two years before it sold, and his or her partner was added to the title for two months prior to the sale. That works. But, both the bride and groom must have lived in that home for two years before it was sold even if the one partner was only on the title for two months before they married. And, if either party sold a home within the last two years and claimed an exemption, the newlyweds will have to wait until that two-year window closes before claiming any profits from the home they now share.
- Is your home a primary residence, vacation home or a rental property?
What if you aren’t flipping homes? What if you have a second home or a rental property you’ve lived in for two years that you’d like to sell? For tax purposes, it won’t be treated as a primary residence. Before the 2008 shift in the tax code, second homes and rental properties received the same tax benefits even if the home became the primary residence for a time. Now a prorated amount is determined on the number of years the home or rental property was used as a second home or rented out after 2008.
Here’s a “story problem” to help me explain this scenario: If you used your vacation home for 15 years before 2010 when you began using it as your primary residence, 10% of the profit earned on the sale would be taxed. Here’s why: The 2 years following 2008 when your home was used as a vacation home equals 10% of the total 20 years you owned the home. As long as the rest of the profit from the sale of the home falls within the tax exemption limits, it won’t be taxed.
- The more my Brooklyn home sells for, the greater the capital gains tax will be
This isn’t true. For tax purposes, the capital gains tax you owe doesn’t depend on the price you sell your home for. It depends on the amount you profit from the sale. As long as you don’t profit more than the exemption amount allowed on the sale, your home could sell for $1 million and you would not owe any in taxes.
Selling your Brooklyn home can be complicated. There is a lot to know when it comes to taxes and capital gains in New York. For instance, you could be reaching your cap on tax exemptions but still qualify for a partial exemption and not know it. Be sure you talk with your tax accountant before you make a major financial real estate move. Ask important questions and avoid confusion. It’s your accountant’s job to know the details about capital gains taxes on the sale of your home and the tax exemptions available to you. Let them help you get the most from the sale of your Brooklyn home.
If you’re selling your Brooklyn home, contact Charles D’Alessandro, your Brooklyn real estate agent with Fillmore Real Estate at (718) 253-9600 ext. 206 or email [email protected] today. He can help you sell your home and get your questions about capital gains answered.