When you sell your home for more than what you paid for it, you could be subject to capital gains tax on the profit Capital gains tax rates are generally determined by three factors: your taxable income, your filing status and how long you had the property before you sold it.
Whatisthehomesaletaxexemption?
Generally, the IRS allows people who sold their primary homes to exclude a certain amount of the profit from their reportable income. Single filers and those married filing separately can exclude $250,000 of capital gains and those married filing jointly can exclude up to $500,000.
Calculatingcapitalgainstaxonahomesale
The capital gains tax on your home sale depends on the amount of profit you make from the sale Profit is generally defined as the difference between how much you paid for the home and how
much you sold it for.
If you owned the home for a year or less before selling, short-term capital gains tax rates may apply The rate is equal to your ordinary income tax rate, also known as your income tax bracket
If you owned the home for longer than a year before selling, long-terms capital gains tax rates may apply. The rates are much more forgiving. Many people qualify for a 0% tax rate. Everybody else pays either 15% or 20%, depending on your filing status and taxable income
Example: Let's say that you bought a home 10 years ago for $200,000 and sold it today for $800,000 Your net profit would be $600,000 If you’re married and filing jointly, $500,000 of that gain might not be subject to the capital gains tax because of the exclusion but $100,000 of the gain could be subject to long-term capital gains tax.
AdditionalStateTaxesonCapitalGainsinCalifornia
Additionally, California (and some other states) will treat the capital gains as ordinary income for tax purposes (it just gets added on top of whatever else you make, and the total amount is treated as your taxable income) The greater the amount, the greater the risk of being pushed into California’s highest tax bracket of 14.4%. The new 14.4% rate is the result of no limit on California’s 11% employee payroll tax for State Disability Insurance
PotentialImpactofCapitalGainsinCalifornia
Therefore, the worst case, for high profits (or high earners) in California, capital gains taxes are up to 37.1%. That’s over a full one-third of the gain taken in taxes!
IntermediatedInstallmentSale(IIS)Trust is a financial strategy used by sellers to defer capital gains taxes when selling a high-value asset In this arrangement, the seller places the asset into a trust before the sale. The trust then sells the asset to the buyer, and the seller receives installment payments over time from the trust This method allows the seller to spread out the recognition of capital gains over the period of the installment payments, potentially reducing the immediate tax burden The IIS Trust can be particularly advantageous in situations where the seller expects to be in a lower tax bracket in future years, making it a strategic tool for tax planning and asset management
DelawareStatutoryTrust(DST) allows investors to hold fractional interests in a trust that owns, manages, and sells real estate properties This structure is commonly used in 1031 exchanges, enabling investors to defer capital gains taxes by reinvesting proceeds from the sale of a property into a DST The trust is managed by a trustee, while investors, as beneficiaries, own a pro-rata share of the DST and thereby share in the income, gains, losses, and tax benefits DSTs offer investors the advantage of owning real estate without the complexities of direct management, providing a passive investment vehicle that can diversify an investment portfolio across various properties and geographic locations.
CharitableRemainderTrust(CRT) is a tax-exempt irrevocable trust designed to reduce the taxable income of individuals by first dispersing income to the beneficiaries of the trust for a specified period of time, and then donating the remainder of the trust to designated charities. This financial tool allows the trust's creator to receive a tax deduction upon the trust's establishment, based on the value of the donation to the charity. Beneficiaries receive income from the trust for a set number of years or for life, which can come from interest, dividends, or the sale of assets held by the trust. After this period, the remaining assets are transferred to one or more previously specified charitable organizations. CRTs are an effective way to support charitable causes while also providing financial benefits to the donor and beneficiaries
The full $10,000,000 is invested on behalf of the client rather than having only $7,000,000 available if the client were to sell without the IIS
In our example, the client gets to use the $3,000,000 taxes for 10 years or more instead of the money going directly to the IRS upon sale of the real estate
The interest cost to use $3,000,000 is 0% Bank would charge interest Futurecapitalgainstaxpaidwithdepreciateddollarsduetoinflation
With the IIS, payment of the capital gains tax liability can be deferred 10-20 years or more
If inflation is 2% annually, the value of $3,000,000 falls to $2,460,000 in 10 years, $2,019,000 in 20 years, and to $1,656,000 in 30 years
Intermediated Installment Sale (IIS) Trust
Advantages Disadvantages/Risks
Eliminates risk “carrying note from buyer”
Provides more investable cash and income vs selling without IIS tax strategy
Deferral of capital gain taxation – gains only taxable as received
Uses inflation to your advantage by paying taxes with inflation adjusted dollars
Nevada based trust so benefit from favorable asset protection laws
Diversify assets
This type of structure can not be used when the property or asset is sold at a loss or sold by dealers
An installment sale can not be used for inventory that is sold during the normal course of business
Stocks or other investment securities can not be used for an installment sale
Installment sales are restricted to individual buyers and sellers
Advantages Disadvantages/Risks
Qualifies for 1031 exchange
No property management responsibilities
Receive income from investment
Estate Planning Tool (Step up basis, bickering heirs)
Swap Til You Drop No K-1 (1099/1098)
Insurance policy in case can’t acquire original property
Eliminate “boot”
Lower investment minimums
Limited personal liability (loans nonrecourse to investor)
Diversify assets across geography and property types
There is risk of investment loss
Investment is Illiquid
Shares are not traded on an exchange Normally liquidation event every 7-10 years
Must do due diligence on DST sponsor company (Quality of sponsor can vary widely)
