Boston Condos for Sale and Apartments for Rent
Capital Gains Taxes When Selling a Home. Explained in Simple Terms
When calculating how much your Boston condo has increased in value, you have to identify its COST BASIS – meaning anything and everything that you spent to pay for the product. The IRS defines a capital improvement as a home improvement that adds market value to the home, prolongs its useful life or adapts it to new uses. Minor repairs and maintenance jobs like changing door locks, repairing a leak or fixing a broken window do not qualify as capital improvements.
Capital improvements and things you can put in your COST BASIS include:
- The price you paid for the property, including settlement costs, such as: title fees, legal fees, recording fees, survey fees, and any transfer taxes or fees you paid in connection with the purchase.
- Additions: An added extra bedroom or bathroom, a deck on the back of the home, a new garage, an added porch or patio….anything that adds value to your home.
- Lawn and grounds improvements: Value-adding landscaping projects, driveway or walkway construction, a new fence or retaining wall, adding a swimming pool, etc can qualify as property improvements.
- Exterior improvements: New windows, a new roof, and new siding are examples. Any and all renovation costs including ANY and ALL costs related to that renovation work.
- Insulation: This includes insulation in the attic, inside walls, under floors, or around pipes and ductwork.
- Systems: Installing a new heating or air conditioning system, new ductwork, adding a central vacuuming system, wiring improvements, installing a security system, solar, geothermal, generators, batteries, and putting in lawn irrigation are improvements.
- Plumbing: Installing a septic system, water heater, or soft water system adds value.
- Interior improvements: New appliances, kitchen renovations, new flooring/carpeting, the installation of a fireplace, etc.
If you needed to make home improvements in order to sell your home, you can deduct those expenses as selling costs as long as they were made within 90 days of the closing. Your COST BASIS does NOT include hazard insurance premiums, moving expenses, or any mortgage-related charges (mortgage insurance, credit report fees, and appraisal costs are out) and general repairs that are essential to keep something working do not qualify. Yard maintenance, HOA fees, and real estate taxes don’t count. Always check with your accountant.
Keeping tabs of these costs throughout the lifetime of a house/condo is wise.
Updated Boston Real Estate Blog 2022
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Boston Condos for Sale
Capital Gains Taxes When Selling a Home. Explained in Simple Terms
What Are Capital Gains Taxes? Do you know how real estate capital gains taxes work when selling a house?
Selling your Boston downtown condo can net you a significant return. But what does the tax man have to say about it?
With property values in downtown Boston skyrocketing, now more than ever, it is important to understand capital gains taxes on the sale of a Boston condo for sale.
Understanding how capital gains work when selling a home is essential. You need to know the laws whether the home is your primary residence or a rental property.
Let’s take a deep dive into everything you need to know.
What is a real estate capital gains tax?
A capital gains tax is specifically a tax on the money you have made from an investment. When a capital asset such as a Boston Seaport condo for sale or other real estate is sold, your gains become realized. At the point of sale, it becomes taxable income.
What real estate long-term capital gains?
The profits on the sale of your home never become taxable until a sale takes place. The capital gains tax applies to profits on assets held for longer than a year. These are referred to as long-term capital gains. The long-term capital gains tax rates are 0%, 15%, or 20%, depending on the tax bracket you fall into. As you can see, there is a wide difference from low to high for long-term capital gains rate.
What is real estate short-term capital gains?
A short-term capital gain pertains to assets that are held for less than a year. They are taxed as ordinary income. You will pay ordinary income tax rates depending on your tax bracket. For the vast majority, long-term gains are less costly than short-term gains.
Your taxable capital gains for a given year will be reduced by the capital losses you incurred for that year.
How is capital gains determined?
Taxable capital gains for the year are reduced by the total capital losses incurred in that year. Capital losses are when you sell an asset for less than the sales price. Your long-term capital gains less any capital losses are known as the net capital gain. This is the amount on which capital gains taxes will be assessed.
That being said, real estate transactions are treated differently. You are allowed a substantial deduction whether you are a single person or are married. We will discuss this at length.
How Does The Capital Gains Tax Rate Work?
The following is the long-term capital gains tax rates for 2021:
| FILING STATUS | 0% RATE | 15% RATE | 20% RATE |
|---|---|---|---|
| Single | Up to $40,400 | $40,401 – $445,850 | Over $445,850 |
| Married filing jointly | Up to $80,800 | $80,801 – $501,600 | Over $501,600 |
| Married filing separately | Up to $40,400 | $40,401 – $250,800 | Over $250,800 |
| Head of household | Up to $54,100 | $54,101 – $473,750 | Over $473,750 |
According to the Internal Revenue Service chart, in 2021, single people won’t have any capital gains taxes if their taxable income comes in at $40,400 or less.
The rate increases to 15 percent on capital gains for single filers if your income falls between $40,401 to $445,850. When your income increases above that level, the tax rate increases to 20 percent.
Your tax filing status can really make a difference when it comes to capital gains tax liability. The income tax you pay can vary substantially. As you can see from the IRS publication, there are tax benefits for being married and filing jointly for capital gains.
Single taxpayers often pay quite a bit more in taxes.
Short Term Capital Gains Tax Rates For Tax Year 2021
When paying short-term capital gains taxes, the tax bracket for ordinary income will apply. For 2020 the tax brackets are:
- 10 percent
- 12 percent
- 22 percent
- 24 percent
- 32 percent
- 35 percent
- 37 percent
It is important to note that the income amounts that pertain to each tax bracket will differ depending on your filing status. For example, single filers will have a different tax liability and, therefore, different income tax than a married couple. A married couple could file a joint return or file separately. A tax return will differ, as will the amount of taxes you pay based on how you file.
Nerd Wallet has an excellent resource that breaks down all income levels for each tax filing status. Take a look to see where you fall to calculate better the amount of capital gains you’ll pay.
As you can see, property owners really get whacked hard if they have to sell quickly. Sometimes there are unforeseen circumstances such as job changes that force a quick sale of your main home. Otherwise, it makes sense to stick it out to meet the residency requirement to have a long-term capital gains exclusion.
Real Estate investors who fix and flip properties are up against the short-term capital gains tax all the time. Creative ways to reduce their taxable gain are often needed. Short-term capital gains are treated just like regular income. That being said, let’s take a deeper look into the real estate capital gains tax exclusio
Real Estate Capital Gains Explained
Fortunately, real estate capital gains are one of the best tax breaks available to the average person. This means that you have little to worry about in most situations unless your home will bring in a significant amount of money.
You have to realize substantial gains on your personal home before you pay a penny to taxes. In most instances, the rules are as follows:
- If you are single, you can make up to $250,000 in profits from your home sale before you have to pay taxes.
- If you are married, you can make up to $500,000 in profits before paying capital gains tax.
Here is an example of the real estate capital gains law: Let’s say you were fortunate to purchase your home for $500,000, and it is now worth $800,000. Your $300,000 in profit or gain will not be taxed if you are married, as the $500,000 in profit is excluded from taxation.
So what happens if you are going to make more than $500,000 in profit? Under the current tax laws, you would be taxed at a 20% capital gains tax rate on the amount over the $500,000 threshold.
This is pretty exciting news for most home sellers. Granted, some areas have seen severe real estate booms, where you may be able to go over these numbers when you sell. But for most home sellers, there is little worry of needing to pay Uncle Sam for their home sale.
However, you do have to meet all of the requirements, which I will explain in another Boston real estate blog post.
Boston Real Estate Capital Gain Taxes FAQ
What is a real estate capital gains tax?
Capital gains tax is specifically a tax on the money you have made from an investment. When a capital asset such as a Boston condo or other real estate is sold, your gains become realized. At the point of sale, it becomes taxable income.
What real estate long-term capital gains?
The profits on the sale of your home never become taxable until a sale takes place. The capital gains tax applies to profits on assets held for longer than a year. These are referred to as long-term capital gains. The long-term capital gains tax rates are 0%, 15%, or 20%, depending on the tax bracket you fall into
What is real estate short-term capital gains?
Short-term capital gain pertains to assets that are held for less than a year. They are taxed as ordinary income. You will pay ordinary income tax rates depending on your tax bracket. For the vast majority, long-term gains are less costly than short-term gains.
