If you have sold a home or piece of property this year you may not be looking forward to tax season. The hit that many homeowners take on their capital gains through their taxes can be a tough pill to swallow. As the saying goes, “The only sure things in life are death and taxes,” and that couldn’t be more true with the Capital Gains tax.
There really is no way to avoid paying what you owe to the government and the more you try to avoid it the bigger the trouble you may end up causing yourself. If this is the first time that you have sold a home or property then you may not be that familiar with the tax rules governing income and capital gains, but that won’t matter to the IRS.
You can get the basics here if you take a minute to read about capital gains and what they might mean for you at tax time.
What Is A Capital Gain?
In simple terms, any capital gain is the amount of profit that you make on the sale of a home or property. For example, if you originally purchased your home for $250,000 and then ended up selling it down the line for $400,000 you will have amassed a Capital Gain of $150,000. If you end up not selling your home for a profit you will have a Capital Loss instead.
If you are trying to figure out how much tax you will have to pay on your Capital Gains, the basic calculation is pretty easy. An even 50% of the amount of gain will be taxed and added to your annual income to be calculated with your personal income tax. So if your gain was $150,000, you will have to claim an additional $75,000 on your personal income. This addition to your overall income can easily put you up into a higher tax bracket meaning that you can expect your tax bill to be higher than it usually is.
Sale or Gift?
People try many different ways to lower the amount of tax that they will have to pay because of Capital Gains, but none of them are advisable. If you were to lowball your selling price on a property to keep the capital gain figure small, the IRS will still use the Fair Market Value price of your property to do the correct calculations for your Capital Gains. The only exception to the tax rules of Capital Gains is if the property is given as a gift between spouses which are tax-free.
When you are ready to claim your Capital Gains on your taxes, you need to make sure that you attach all of the relevant paperwork with your tax returns. You will need to verify information like the original purchase price of the property along with the recent bill of sale confirming the selling price, the acquisition date and a record of any commissions paid. It is important to keep all property related documentation together and well organized.