When it comes to selling your home or business, many factors are at play. What is its initial value? How much will you be selling it for? How much will you profit from it? And, most importantly, how much will be taxed from your profits? Apart from considering both of your incomes when it comes to determining the tax burden, another thing to consider is the capital gains tax.
Capital gains tax, sometimes referred to as CGT, is pretty straightforward. It’s what the government charges you for selling properties, specifically capital assets, from stock investments to real estate assets. How much they charge you depends on your income tax rate and the length of time you owned the said property. They also charge differently when it comes to house sales.
The thing about the capital gains tax is that you can take advantage of this compulsory charge and let it work in your favor. The best part is that all these ways are legal because of the nuances of CGT itself. That way, when selling a property, the tax burden won’t be too much for both parties.
Remember that the CGT only takes effect when the gain or the loss is realized; that is to say when the money is already there. You don’t have to pay for the income taxes you’re supposed to pay for yet when the value of the capital asset increases because there’s no literal gain or loss yet. Of course, once you sell the property, that’s when all the capital gains are taxed. However, you could do a 1031 exchange for a ranch property or any like-kind properties to further defer the payment of the CGT.
Recall that the government charges differently when it comes to selling a house. They also offer CGT exclusions for homeowners. If you’re thinking of selling your home -more specifically, your primary residence -up to $250,000 worth of capital gains ($500,000 for married couples) from the sale is tax-free. This, of course, is if you’ve been living in the said house for a few years.
There’s a benefit to not just selling your property a la hot potato, as seen from the previous two methods. Should you choose to sell your asset, make sure you’ve had that property for more than a year before doing so. This is so you would only be charged for long-term capital gains tax, which is lower than your marginal rate, which happens to be the basis of short-term CGT. Instead of getting taxed at 33%, for example, you’ll only be taxed at 15%. You’ll still be taxed for it, but at a significantly lower rate.
Sometimes, you have to sell a stock investment or a property at a loss. It’s just the nature of business. Some properties increase in value, some depreciate. However, you can use your capital losses to your advantage. When you sell an investment that has gained value, you can use your capital losses to offset said gain, therefore decreasing your CGT. This method is referred to as tax-loss harvesting.
Like all taxes, there are workarounds you can do to keep your profits up and your taxes at a minimum. You don’t always have to be burdened by all the taxes you need to pay. Be smart about the investments and assets you sell to take advantage of the capital gains tax.