If you’re thinking of selling your home, you may be wondering how changes in the capital gain tax will affect your finances. Here’s a round-up of capital gain tax information from DomiDocs and leading experts across the country.
What Are Capital Gains?
Capital gains are profits made from the sale of capital assets such as real estate, investments, and personal property including household furnishings. The Internal Revenue Service (IRS) classifies capital gains according to the length of time the taxpayer owned the property.
- Short-term capital gains refer to profits made from selling assets owned for one year or less
- Long-term capital gains are profits earned on assets owned for more than one year
Taxable gains are calculated on the cost basis of your residence, not the purchase price, so it’s important to track all of your receipts for remodeling and home improvement projects. DomiDocs provides a secure digital platform for storing all your important receipts making it seamless and simple to capitalize on potential capital gain tax savings.
Current Capital Gain Tax Rates
Notwithstanding any annual adjustments for inflation, there aren’t currently any capital gain tax rate changes for 2021. Short-term capital gains are subject to taxation as part of your regular income at graduated tax rates. According to the Internal Revenue Service (IRS), tax rates for long-term capital gains, depending on your income and marital status, remain the same for 2021 at:
- 0% – if your taxable income is less than $80,000
- 15% – if your taxable income is over $80,000 but less than $441,450 (single); $496,600 (married filing jointly/widowed); $469,050 (head of household); $248,300 (married filing separately)
- 20% – if your taxable income exceeds the above thresholds for the 15% capital gain tax rate
Exceptions to the above rate rules can include qualified small business stock under IRS section 1202 and net capital gains sourced from selling collectibles such as art or coins (all taxable at a maximum rate of 28%); as well as for the unrecaptured gain under section 1250 for selling real property, which is taxed at a maximum rate of 25%.
Capital Gain or Loss?
According to the IRS, “If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 21 of Schedule D (Form 1040). Claim the loss on line 6 of your Form 1040 or Form 1040-SR. If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in Publication 550, Investment Income and Expenses or in the Instructions for Schedule D (Form 1040) PDF to figure the amount you can carry forward.” The IRS reminds taxpayers “Losses from the sale of personal-use property, such as your home or car, aren’t tax deductible.”
Proposed Capital Gains Tax Changes Under the Biden Administration
With both the Senate and the House under Democratic control, the Biden administration could potentially still make changes to the capital gains tax in 2021. However, if you earn less than $1 million, any proposed changes will still be in your favor as President Biden will instead be targeting the richest of Americans earning $1 million or more with a planned long-term capital gains tax rate of 36.9%. Add in a 3.8% Medicare surtax on net investment income and this culminates into a 43.4% long-term capital gains rate for the wealthy; it’s important to note this surtax applies to both short-term and long-term capital gains.
According to financial experts, while it’s not likely a capital gains tax hike could be passed retroactively, it’s still possible. Chairman of Adviser Investment Management, Dan Wiener, says: “We know that tax rates are likely going up. The question is, will it be 2021 or 2022? I don’t think individual tax rates are the bigger concern, I think corporate tax rates and capital gains are going to be the main focus. It’s very unlikely they will try to force a big corporate tax hike this year.”
Potential Changes to 1031 Exchanges
A 1031 exchange is a way for real estate investors to defer any capital gain tax payable upon the sale of a property from which they’ve earned money. The basic premise is that if you use property proceeds to purchase another property, you can defer capital gains until the new property is sold. While President Biden hasn’t formally mentioned 1031 exchanges specifically, his tax plan does call for the elimination of tax breaks which could very well include the estimated $4 billion in potential lost tax revenue annually currently allowed by 1031 exchanges.
Besides securely storing your receipts, DomiDocs is a complete digital enablement platform for homeowners where you can track the current value of your home through the True Value Index®, schedule regular home maintenance tasks, and be organized by storing all of your warranties, manuals, and vital insurance documents online. It’s a win-win for everyone!
Author – Connie Motz