Capital Gains Tax Fundamentals for Real Estate
Capital gains taxes apply to property sales when sale price exceeds purchase price plus improvements. Long-term gains (property held over one year) receive preferential tax rates. Short-term gains (property held under one year) are taxed as ordinary income. Federal rates range from 0% to 20% for long-term gains depending on income. Understanding gain calculation ensures accurate tax planning.
Primary Residence Exclusion and Requirements
Primary residence exclusions allow excluding $250,000 (single) or $500,000 (married) in gains. Ownership and use tests require two of past five years' residence or qualified use. Eligibility conditions must be carefully documented. Previous use of exclusions affects current eligibility. Meeting requirements generates substantial tax savings.
Depreciation Recapture and Section 1250 Property
Depreciation deductions reduce basis, creating recapture when properties sell. Depreciation recapture is taxed at 25% rate regardless of holding period. Unrecaptured Section 1250 gains affect net investment income tax calculations. Understanding recapture prevents surprises on disposition. Strategic planning addresses recapture implications.
Net Investment Income Tax and Medicare Surtax
Net investment income tax adds 3.8% to gains for high-income taxpayers. Threshold incomes of $200,000 (single) or $250,000 (married) trigger tax. Rental property sales trigger NIIT for affected taxpayers. Planning sales across multiple years may reduce NIIT exposure. Understanding NIIT affects high-income taxpayer planning.
Installment Sales and Tax Deferral
Installment sales spread gains over multiple years reducing annual tax impact. Percentage of gain recognized matches percentage of principal received. Deferred payments allow spreading income across lower-tax years. Installment sales require holding period and income deferral. Strategic use of installment sales optimizes tax outcomes.
State and Local Tax Considerations
California's top income tax rate of 13.3% applies to capital gains. Local taxes may apply in some jurisdictions. Tax planning considers both federal and state implications. High-income taxpayers benefit from careful planning around state lines. Understanding all tax layers ensures complete tax planning.