Understanding how the 2018 capital gains tax changes may impact your real estate decisions for the coming year.
When you sell a stock, you owe taxes on your capital gain—the difference between what you paid for the stock and what you sold it for. The same holds true when selling a home (or a second home) but there are some special considerations. Use the information from this article to start a conversation with or ask questions of your financial advisor.
Before jumping into discussing 2017-2018 capital gain taxes let’s do a mini-refresher of how capital gains are calculated.
How to Calculate Capital Gain
In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. To calculate, follow these steps:
- Purchase price: _______________________
The purchase price of the home is the sale price, not the amount of money you actually contributed at closing.
- Total adjustments: _______________________
To calculate this, add the following:
Cost of the purchase — including transfer fees, attorney fees, and inspections, but not points you paid on your mortgage.
Cost of sale — including inspections, attorney fees, real estate commission, and money you spent to fix up your home just prior to sale.
Cost of improvements — including room additions, deck, etc. Note here that improvements do not include repairing or replacing something already there, such as putting on a new roof or buying a new furnace.
- Your home’s adjusted cost basis: _______________________
The total of your purchase price and adjustments is the adjusted cost basis of your home.
- Your capital gain: _______________________
Subtract the adjusted cost basis from the amount your home sells for to get your capital gain.
Source: REALTOR® Mag, the official magazine of The National Association of Realtors
An example with real numbers:
If you and your spouse bought a house for $100,000 and sold it for $650,000, but you’d added $20,000 in home improvements, spent $5,000 fixing the place up for the sale, and paid the real estate brokers at least $25,000, the exclusion plus those costs would mean you’d owe no capital gains tax at all.
Capital Gain Taxes in 2018
Congress recently passed the Tax Cuts and Jobs Act which triggers varying tax changes effective in 2018. There will be a number of changes to individual tax codes. One concern is the impact this may have on capital gain taxes. Nothing has changed in the basic capital tax gains structure. Long-term capital gains continue to be defined as gains made on assets held over the course of a year while short-term gains come from assets you have held less than a year. For both types described, the 3.8% net investment income tax applies to high earners and will stay in place with the exact same income thresholds. This is part of the Affordable Care Act not successfully repealed or replaced by Congress, as of the time of this writing.
The applicable long-term gains rates are 0%, 15%, and 20%, however, how these are applied has changed slightly. Under the previous law the 0% rate applied to the two lowest tax brackets, the 15% rate applied to the next four, and the 20% rate applied to the top bracket. Under the Tax Cuts and Jobs Act, these three gains income thresholds do not match up perfectly with the tax brackets. Learn more about the income taxable levels and mismatch brackets at this article.
Staying Informed Before Listing Your Home
Before listing your home for sale have a discussion with your REALTOR®, your certified public accountant, and your mortgage professionals so you can determine if and how the capital gains tax exclusion on the sale of a home may affect your listing.
The old rules to be done once every two years allow homeowners and flippers to buy, occupy for two years, sell for a profit, and not pay income taxes on the profit. The profits were not required to be put down on another property to avoid this tax. Both the Senate and House versions of the Act called for increasing the timeframe for exclusion of taxation to five out of eight years, the final negotiated version kept it at the last two of five years.
It’s important to note that this exclusion of taxation is for your primary residence only. Second homes, or other real estate, do not qualify for the exclusion of gain. Any gain on those will be taxed. Additionally, if you have a loss on the sale, you do not get to deduct that loss. Unlike stocks or other investments that are sold at a loss, you cannot deduct the loss on the sale of any of your residences. They are deemed to be personal losses.
Selling in Less Than 2 Years
If you own the house less than two years and want to sell for a profit, you will need to keep two things in mind: the profit amount and calculating all allowed expenses to lower your tax burden.
The allowed expenses include:
- REALTOR® commissions
- Seller closing costs
- Seller paid costs for the buyer
- Certain improvements made to the home are permissible. Your financial advisor will be able to advise.
If you make no profit after all calculations are determined then there is no capital gains tax to pay. Keep in mind that if the sale price is higher than the original price this does not mean there is a taxable profit. Your financial professional can provide solid tax advice for ways to lower any profit or possibly get rid of it completely.
Hopefully, this article provides a better overview of capital gains and has given you some topics or questions to pose to your financial advisor.
DISCLAIMER: Active Adults Realty strives to provide you with conversation-starters to discuss with your own financial advisor. This article is not tax advice. Always seek advice from a licensed tax professional or certified public accountant.
If you are preparing to buy or sell a home with active adult living in mind, why not sit down with an Active Adults Realty agent here in Delaware, and discuss the best way to prepare to get a great deal. We are happy to have a no-strings-attached discussion with you and help you best prepare to make the right decision on a home when the time arrives. Contact us today to schedule an appointment.