Investment Taxes

What Are the Taxes Due on the Sale of Investment Property?

Capital Gains Tax:  Is 15% for most taxpayers, for those with annual income less than $400K per individual or $450K per married couple who file jointly.    

Section 1411 Medicare Surtax or Affordable Care Act (ObamaCare) Surtax:  3.8% only applies to those who have an annual income of over $200K per individual or $250K per married couple filing jointly.

Combined Tax Rate:  That means that those with an annual income over $400K or couples who file jointly making over $450K, would be taxed 23.8% in taxes on the profits from their investments!

Depreciation Recapture:  No matter what your annual income, the portion of your total gains that were depreciated is taxed at 25%. That is called Depreciation Recapture and is often the biggest surprise for most investors.

Tax-Free Exchange?

I know you often see internet mention of a tax-free exchange, but it is really a tax deferred exchange. You get to use the money that you would have paid to the IRS today, and as long as you don’t sell the property, you don’t have to pay the taxes on it. Not unlike a 401K

What about State Taxes

Every state has different rules. In Washington we have an Excise Tax. That is like a sales tax and cannot be deferred in an exchange. If Washington were to enact a capital gains tax that would likely also be exchangeable.

Happy Investing!

Today's blog courtesy of Kevin Hummel, McFerran Law

Capital Gains Tax

There are two ways for property owners to defer capital gains tax: either through a 1031 tax exchange or by offering seller financing. I have blogged extensively about both of these approaches, and a search of this blog site will bring up these posts. But today, I want to focus on capital gains tax.

Wikipedia defines capital gains tax (CGT) as a tax on capital gains, the profit realized on the sale of a non-inventory asset that was purchased at a cost amount that was lower than the amount realized on the sale.

In the United States, with certain exceptions, individuals and corporations pay income tax on the net total of all their capital gains. Short-term capital gains are taxed at a higher rate: the ordinary income tax rate. The tax rate for individuals on "long-term capital gains", which are gains on assets that have been held for over one year before being sold, is lower than the ordinary income tax rate.

The tax rate on most capital gains is no higher than 15% for most taxpayers. Some or all net capital gain may be taxed at 0% if the homeowners are in the 10% or 15% ordinary income tax brackets. However, a 20% rate on net capital gain applies in tax years 2013 and later to the extent that a taxpayer’s taxable income exceeds the thresholds set for the new 39.6% ordinary tax rate ($406,750 for single; $457,600 for married filing jointly or qualifying widow(er); $432,200 for head of household, and $228,800 for married filing separately).

There are a few other exceptions where capital gains may be taxed at rates greater than 15%:

1. The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
2. Net capital gains from selling collectibles (like coins or art) are taxed at a maximum 28% rate.
3. The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate. 1250 property is generally defined as improved commercial real estate and is real property subject to a depreciation deduction on the taxpayer's return.

Homeowners are allowed an exemption of $250,000 in profits on the sale of a primary residence if the owner is single, $500,000 if a married couple.

Taxpayers may be able to defer, reduce, or avoid capital gains taxes using the following strategies:

• Tax may be waived if the asset is given to a charity.
• Tax may be deferred if the taxpayer sells the asset but receives payment from the buyer over a period of years. However, the taxpayer bears the risk of a default by the buyer during that period.
• In certain transactions, the basis (original cost) of the asset is changed. In the U.S., the basis for an inherited asset becomes its value at the time of the inheritance.
• Tax may be deferred if the seller of an asset puts the funds into the purchase of a "like-kind" asset. In the U.S., this is called a 1031 exchange and is now generally available only for business-related real estate and tangible property.

Additional information on capital gains and losses is available in IRS Publication 550, Investment Income and Expenses, and Publication 544, Sales and Other Dispositions of Assets. If you sell your main home, refer to Topics 701 and 703, and Publication 523, Selling Your Home. 

Happy Investing!