If you are putting your property up for sale in Chicago, one of the costliest payments you have to make is capital gains tax. Read on to know exactly what this is and what you can do to reduce it.
How do capital gains work?
Let us first define what capital gains are and how they figure in an investment. When you sell an asset at a higher price than what you originally bought it for, then you earn what is called a “capital gain.” This applies to stocks and bonds, cars, real estate, and more. For example, if you bought a house for $200,000 and sold it for $300,000, you would have a capital gain of $100,000.
Then again, if you had any value-boosting home renovation, costs for this could be added to your base price and as a result, lower your capital gains. So if you made renovations amounting to $20,000 on your $200,000 home, your base price would be $220,000 and you would have a capital gain of $80,000.
Also, keep in mind that any depreciation in the home resulting from either the passage of time or improper maintenance can lower the base price and increase capital gains. Thus, make sure to keep your home well-maintained at all times.
Types of capital gains and their tax rates
The following are the two types of capital gains to consider when computing for your tax rate:
- Short-term capital gains are profits made from the sale of an asset held for a year or less. You can compute for your short-term capital gains tax rate by subtracting your income tax rate from your tax bracket.
Don’t know what your tax bracket is? Check out Nerdwallet’s breakdown of 2018 and 2019 federal income tax brackets.
- Long-term capital gains are profits made on assets owned for more than one year. Tax rates for these capital gains are generally lower than their short-term counterparts, ranging from 0% to 20% depending on your income.
Strategies to reduce your capital gains tax
You cannot avoid paying capital gains tax but there are ways to lower it. So before putting your home in the market, here are some recommended tips to reduce it:
- Live in your house for more than a year before selling
As mentioned earlier, tax rates for long-term capital gains are significantly lower than their short-term counterparts. The longer you keep your property in your possession, the lower your capital gains tax gets.
- Sell when you have capital losses
Any capital losses you make are subtracted from your total capital gains. So if you earn $100 for selling one stock but sold another at a $50 loss, then your capital gain is only $50.
- Sell when you have lower income
Since your marginal tax rate is determined by your income, selling at a time when you have decreased income could reduce your capital gains rate. These instances of decreased income may stem from your retirement, work retrenchment, or having a spouse who has just left their job.
- Lower your taxable income
Practicing general tax-saving strategies does not only lower your taxable income, but it brings down your capital gains rate, as well. Making the most out of your tax credits and deductions by donating to charity or covering health care costs before the end of the year is a good way to start.
You should also look out for little-known tax deductions such as tax preparation fees, personal legal bills, and even hobby expenses.
If you can contribute more to your 401(k) and IRA, you can end up saving thousands worth of taxes and set yourself up for the future.
Exclusions on capital gains tax
The IRS allows special exclusions for both single and married home sellers. If you are single, you get $250,000 slashed off from your capital gains tax. For married couples who are filing jointly, $500,000 will be excluded. However, keep in mind that the house you are selling must be your principal residence for these exclusions to take effect.
There are also special situations when they do not count. These are:
- Owning and not living in the home for less than two years in the five years before selling it.
- Already claiming an exclusion on a different home in the two years before selling the current home.
- Buying the house by swapping it with another (1031 exchange)
- Being subject to expatriate tax.
Put your home on the top of Chicago real estate listings by working with our team of real estate experts at 606 Brokers. With us, you can tick all of the items in your home selling checklist. Give us a call today at 773.870.5101.
References:
https://www.nerdwallet.com/blog/taxes/capital-gains-tax-rates/
https://www.nerdwallet.com/blog/taxes/selling-home-capital-gains-tax/
https://www.finder.com/avoid-capital-gains-tax-when-selling-property
https://www.moneycrashers.com/reduce-avoid-capital-gains-tax-property-investments/
https://www.moneycrashers.com/list-common-overlooked-personal-tax-deductionsindividuals/
https://www.fool.com/slideshow/18-ways-lower-your-2019-tax-bill/?slide=2