By Kathy McSherry | Ask Kathy
My partner and I own a rental unit that is a small one bedroom, one bath condominium with one parking space in Mission Valley. We bought it in 1998. We are thinking of selling it and pulling out the equity to use for a down payment on another property. All I keep hearing about is capital gains tax.
I am not exactly sure what that means and will I need to pay it? Can you help clarify for me?
Funny you should inquire about capital gains tax as there are new laws in effect as of this year.
First, let me help you to understand what exactly it is. Capital gains tax is referring to the profits from the sale of an asset. In real estate, people’s homes are typically their largest asset. This gain or profit is considered taxable income.
It also depends on how long you have owned it.
Short term capital gains are profits made from the sale of an asset held for one year or less. These profits would be equal to your normal income tax bracket, depending on where you fall.
Long term capital gains are the tax on profits from the sale of an asset, your home, held for more than one year. Long term capital gains tax rates are either 0 percent, 15 percent, or 20 percent, again depending on your taxable income bracket and what your filing status is (single, married, married filing jointly, married filing separately, head of household, etc.; please defer to your CPA for more clarification). Long term capital gains taxes are generally lower than short term. Typically, the longer you hold on to your asset the better the tax benefits.
If you own two properties and make a profit on one for $10,000, and a loss on another for $4,000, your net gain is $6,000. That $6,000 is typically taxed as additional income according to your tax bracket.
But, there are rules and exceptions. Check with your tax expert or CPA for more detailed information on your taxes to be paid.
As of 2018, the deduction for state and local taxes, also known as the SALT deduction, will not be offered to taxpayers. In the past, SALT deductions have been lucrative for taxpayers, particularly in high-tax status states like California, New York and New Jersey. This deduction includes not only property taxes, but state and local income tax or sales tax. This was a very contentious part of the tax reform process. Now, even though Republicans wanted to do away with the tax entirely, they put an annual cap on the deduction.
The cap is now $10,000. For instance, if you live in NY, let’s say the average SALT deduction was $21,000; now your deduction just got cut in half. However, they nearly doubled the standard deduction. (Deductions that do not have to be itemized.)
Anyone who itemizes can deduct their property taxes, but people filing must choose between deducting their income tax or their sales tax. Residents of states with high income tax, like California, generally opt to deduct their state and local income taxes if they itemize. Residents of states with high sales tax like Texas and Louisiana and low or nonexistent income tax, generally elect to deduct their sales tax. So, property taxes and income taxes – not sales taxes – are the primary forces behind the SALT deduction. Remember, the higher your income, the more taxes you pay and therefore the more deductions you want to take to help offset a higher tax rate.
Edward, I know it can seem daunting and confusing but regardless of the changes, your home is typically your biggest asset and you want to be able to take advantage of the most tax savings and benefits available. Consult your CPA or tax attorney and they will be able to help you maximize the most tax saving benefits. I hope this helps to understand some of the changes that happened this year. Best of luck.
— Kathy McSherry is a Realtor at Coldwell Banker Residential Brokerage. Email your questions to firstname.lastname@example.org, or call 702-328-9905.