Q: We would like to know about the new tax law that is in effect from 2018 to 2025, that if you are single and your adjusted gross income is under a certain amount in 2019, you pay 0% capital gain taxes on the profits from selling a long-term real estate investment. My question is, does it also apply when selling your personal place of residence? -- Connie
First of all, the new tax law (the Tax Cuts and Jobs Act) actually didn't make any changes to the capital gains tax brackets. There has always been a 0% capital gains tax rate in effect for people in the lower tax brackets, and this remains true today.
For the 2020 tax year, the 0% rate applies if you have taxable income -- not adjusted gross income -- of $40,000 or less if you're single or $80,000 or less if you're married and file a joint tax return.
Second, the short answer to your question is yes. If your taxable income is less than the applicable threshold, you'll pay 0% capital gains tax on your real estate sale profits. And it's worth pointing out that this assumes you owned the home or investment property for longer than one year.
Finally, it's important to realize that a special exemption applies to the sale of your personal residence (the home sale gain exclusion). Thanks to this, most people pay no capital gains taxes when selling their own home, regardless of their taxable income.
Specifically, this rule says that if you owned and lived in the home for at least two of the previous five years, you can exclude as much as $250,000 in capital gains from taxation when you sell ($500,000 for taxpayers filing joint returns).
For example, let's say that you originally paid $150,000 for your home and you sell it for $400,000. Assuming that you've lived in the home for at least two years as your full-time residence, the IRS can't touch a penny of the gain, no matter how much your other income is.
As a final point, it's important to make sure you're only considering your net profits. Your cost basis in the home takes into account acquisition costs (such as a mortgage origination fee), as well as any capital improvements such as major renovations that you've paid for during your ownership period. And when you sell, your net proceeds are reduced for tax purposes by any selling-related expenses, such as real estate commissions.
The bottom line is that very few people have to pay capital gains tax on the sale of their primary residence. And if they do, it's because they either sold it for a massive profit or didn't own it for very long. Having said all of that, I'd still suggest consulting a tax professional to help guide you through the process and analyze your specific situation when the time comes.
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