President Biden has proposed a capital gains tax increase. At the time of writing this blog post, it has not yet passed. But, many are wondering how this increase would affect them when they sell their real estate holdings.

When was capital gains tax implemented?

Capital gains tax has been in existence as far back as 1913. Taxes were calculated at the ordinary tax rate of the time. The capital gains tax rate has been lower than the top ordinary income tax rate since the 1950s. The percentage of taxation and rules about the sale of capital assets has changed over the years.

Capital assets are homes, cars, investment properties, stocks, bonds, and collectible art with a useful life longer than one year. An asset sale can result in a short-term gain or a long-term gain. Assets held less than a year are considered short-term gains. Long-term gains pertain to assets held longer than one year.

Ordinary tax rates apply to short-term gains. Tax rates on long-term capital gains vary by filing status and income bracket; rates range from 0%, 15% to 20%. Higher-income taxpayers may have to pay an additional 3.8% net investment income tax (NIIT).

Let’s take a look at how capital gains affect real estate.

If you sell your primary residence, you first need to determine if you realize a loss or a gain. To calculate that information, you need to determine your basis. The basis is generally what you paid for the home. You can include the cost for some improvements, but not the expense for regular maintenance and repair of the house. A good rule of thumb is that improvements must add value to the property, change its use, or increase longevity. Consult with your tax professional to learn what can and can not be included to determine your basis.

Special exemptions apply for primary residences if you live in the home for two of the previous five years before the sale date. You also must have owned the house for at least two out of the last five years. They do not need to be the same two years for each requirement. You can only use this exclusion once every two years. There may be exceptions that can disqualify you, which is why you will need to consult with a tax preparer before filing your income tax return. 

If you qualify for the exemption, you will be able to exclude up to $250,000 of capital gains if you are a single tax filer and up to $500,000 of capital gains if you are married filing jointly. 

If you own a second home, it will not qualify for the capital gains exclusion. For example, you own a beach home that you live in for two months out of the year and rent out at other times.

How do capital gains apply to investment properties?

Investors must meet the requirements of living in the home to qualify for the exemption. If you have not, you will not be eligible for the exemption when you sell your investment properties.

Investment properties can also fall under short-term and long-term capital gains. The tax rate for this investment is calculated according to the ordinary income tax rate for your tax bracket if you held it for less than one year. Flipped houses usually fall into a short-term capital gains tax category because investors want to refurbish the home and turn it over quickly.

Any capital gains on an investment property held at least a year would be subject to long-term capital gains tax rates for the investor’s tax bracket.

Like a primary residence, you will need to calculate your cost basis, including purchase cost and any qualifying improvements. You calculate your gain by subtracting your sales price from your cost basis.

A 1031 Exchange can defer capital gains.

If investors want to sell a particular property and invest in a like-kind property, they may qualify for a 1031 exchange. This classification allows the investor to sell now and defer paying capital gains. A third-party facilitator is required to handle the process. The investor is under strict time limits to complete the exchange. The replacement property must be identified within 45 days and close within 180 days of selling the property. In the event of a missed deadline, capital gains tax is applicable.

What are the possible effects of the proposed changes?

The Biden administration’s proposed capital gains tax changes would increase the capital gains tax rates and limit the use of 1031 Exchanges. The proposal includes raising the capital gains tax rate to 39.6% for people making over $1 million per year. It is important to remember that this proposal will affect all capital assets, not just real estate, as we are talking about here.

It may seem that the capital gains tax will not affect many, but in areas where the cost of real estate has skyrocketed, that could be another story. For example, if the property has a low basis, the seller may make a significant capital gain when selling. This considerable gain could put them in a higher tax bracket triggering a higher capital gain tax rate.

Another area of concern in the proposed capital gains tax changes is eliminating stepping up the basis of inherited property. The capital gains on inherited properties are calculated on the home’s fair market value at the time of death or “stepping-up” the basis of the property from the owner’s original purchase price. Utilizing the stepping-up practice reduced the amount of capital gains the estate would be taxed on. 

Because of the increase in prices in New York, this could become an issue for families selling or inheriting long-held estate properties. You can find out more about the proposal’s effects on inherited properties in this recent article from Bankrate.

Should you sell your investment properties?

Real estate investors may be wondering if it is time to sell their investment properties. The answer is as individual as the investor. For example, if you need to sell and your property has held its value, it may be a good time for you to sell. In contrast, you may want to hold onto the property if the value has decreased yet the area expects to increase, and you don’t require cash right now.

There are so many variables to the proposed tax changes; you need to consult with a tax professional to understand how your portfolio will be affected and what the best next steps would be for you. It is unknown what the final changes will be in this proposed legislation and how far-reaching the effects will be.

Contact me, Charles D’Alessandro, your Brooklyn Real Estate Agent with Fillmore Real Estate. As a Brooklyn real estate agent with over 30 years of experience, I can help you find the right home for your primary residence or investment. I can be reached by phone at (718) 253-9500 ext. 1901 or by email at [email protected].

In today’s economy, people are looking for ways to save money.  This is also true when it comes to selling their homes.  Some homeowners believe that selling their homes without a Brooklyn real estate agent will save them thousands.

Is selling your home on your own right for you?  After weighing some of the advantages and disadvantages to selling your home without a Brooklyn real estate agent, you will be able to make a more informed decision on which choice is best for you.

Here are three advantages of selling your Brooklyn home as a For Sale By Owner (FSBO):

1. You may save money by eliminating the commission. Selling your house as a FSBO means you don’t have to pay commission to a listing agent.  The average commission is 6% of the sales price, so you could possibly save that amount.  Unfortunately, buyers know that too.  So, most buyers believe that if you are selling on your own and not paying a commission, they should get the savings – not you.
2. 2. The Multiple Listing Service (MLS) is now available to you. A FSBO can now be advertised on many local Multiple Listing Services.  In the past, this tool was only available to real estate agents and brokers.  You will usually have to pay a fee to get your home listed on the MLS.
3. Offers and counter offers can be negotiated face to face between you and the buyer. You don’t have to wait for your listing agent to talk with the buyer’s agent and get all the paperwork drawn up.  However, if you are not skilled in negotiation, you may leave money on the table.

One other thing to take into consideration before you put up your For Sale By Owner sign is the state of your local real estate market.  If it is a buyer’s market, you will most likely have a hard time selling your home by yourself.  It’s easier to sell your home by yourself when it is a seller’s market.

If you’re still not sure if selling as a FSBO is right for you, and you have plenty of time, you can try selling your home without an agent.  If your home hasn’t sold after a few months, you can then hire a Brooklyn real estate agent.

If you’d like information on how to sell your Brooklyn home on your own or what paperwork you need, I’d be happy to help.  Contact me  Charles D’Alessandro your Brooklyn real estate agent with Fillmore Real Estate at (718) 253-9600 ext 206 or email me at [email protected] to schedule a free no obligation interview or market price review.

Choosing a professional real estate agent or a Realtor, ( National Association of Realtors )can be a very imposing task.  This person is responsible for finding your new home or selling your Brooklyn home, guiding you through the home inspection process and negotiating a good price and terms.  These are important tasks that should be taken seriously.  That’s why finding a skilled real estate agent is key to a successful real estate transaction.

Here are several tips for interviewing Brooklyn real estate agents:

·        Interview at least three agents.  Even if you love the first or second agent you interview, promise yourself you’ll interview all three.  You learn more from each interview, and you never know when that third agent is going to be the perfect match for you.

·        Ask all three agents the same questions so you can compare their answers and ability to communicate.  Write out your questions so you don’t forget any, and take notes during the interviews.  You think you’ll remember what they say, but the specifics will begin to blur as you interview the second and third agent.

·        Ask the Brooklyn real estate agents how long they’ve been in business and how many homes they’ve helped people buy and sell during the last year.  An agent with experience is a very valuable asset, but with the current fluctuations in real estate, an agent with recent experience is even more valuable.   Also ask how long they’ve been helping people buy and sell homes in the area in which you want to live.  You want a real estate agent who is an expert on that neighborhood.

·        Get at least three references of past clients from each of the Brooklyn real estate agents. Then follow up with those references.  Ask a variety of questions such as:

o       What was it like to work with the agent?

o       Would you work with him or her again?

o       What was your least favorite thing about working with the agent?

o       What was the best thing about working with the agent?

If you’re looking for and professional real estate agent and a Certified Negotiation Expert (CNE), I’d be honored to be interviewed for the job.  Call Charles D’Alessandro of Fillmore Real Estate at (718) 253-9600 ext 206 or email me at [email protected] to schedule an interview.