If you’re wondering what to expect when selling your house, you’ve probably already started a to-do list. There are many topics to research, from realtors to moving companies. But you might not have heard about the capital gains tax.
Taxes vary from state to state. It can be a challenge to keep track of everything Florida taxpayers are responsible for paying. Florida state taxes include capital gains, which you need to know for any future house selling.
Keep reading to learn about a thorough breakdown of the property tax, including avoiding capital gains tax in Florida.
What Is Capital Gains Tax?
If you’ve heard of capital gains, you might have lumped the term into property taxes, but it’s not that simple. The capital gains tax is a government fee applied to the profit you make selling specific assets, including property and investments.
Some collectibles are considered taxable on a cost basis. If you have a stamp or coin collection that you’re considering selling, there’ll be a fee for any profit. Any capital assets outside your ordinary income can have a capital gain.
To calculate the fee, you have to know how much you paid for the property of investment. You take that total and compare that to how much you earned selling the asset. If you’ve made more than you’ve spent, that’s where capital gains kick in.
In other words, if you’re wondering how to sell your house without any costs, making a profit will cost you in taxes.
You don’t need to pay a capital gains tax for a property you own. The fee is for taxpayers who already have that sold sign up, and the buyers have signed the proper papers.
There are two types of capital gains: short-term and long-term.
Short-term Capital Gains Tax
If you owned an asset or property for a year or less, you would count it as short-term. The tax rate is decided based on your income tax bracket. A short-term capital gains tax has the higher rate of the two types.
Long-term Capital Gains Tax
For property ownership longer than a year, the long-term tax rate applies—your rate changes depending upon your tax bracket. If you are in a lower tax bracket, under 15%, you can qualify for the 0% capital gains tax.
Long-term capital gains tax rates are generally lower than short-term, regardless of your income tax rate.
How Does Real Estate Tax Work in Florida?
Property taxes are administered by the local government, specifically the state and the county you reside. It is not a federal tax. But, personal property and real estate can be deductible on your federal income tax bill.
Taxpayers in Florida pay lower property taxes on average than most states, with a rate of 0.98%. Florida uses the real estate tax to fund many services, including first responders, recreational services, or municipal infrastructure.
In Florida, the most familiar real estate tax is through your mortgage. If you examine your monthly mortgage statement, one line item should be a property tax. If you don’t see it, check your county’s payment options through the Florida Department of Revenue.
Can I Get Out of Paying Capital Gains Tax on a Property?
There are more than a few honest ways to save tax costs when selling your property.
One exemption that every homeowner can take advantage of is the exception for a primary residence. Regardless of your tax bracket, the IRS allows for $250,000 tax-free capital gain for selling a primary residence. That amount doubles for couples (married filing jointly) taxpayers.
The primary home rule won’t count for a vacation home or capital asset owned for a short time.
If you’ve owned the residence for at least two years and have lived in the home for at least two years, the property is a primary residence. You can’t use the $250,00 exemption if you’ve previously used it within two years.
It’s an easy-to-remember two-year rule. However, there are exceptions to this rule, but you should consult a professional for nuanced inquiries. For example, if a new job forced you to move out of your home in under two years.
Another way to get out of paying capital gains on a property for taxpayers in a lower income tax bracket is the zero capital gains income tax. For married couples, the 0% rate applies if they make under $80,000. Single taxpayers qualify if their income is under $40,000.
The 0% rate only pertains to long-term capital gains.
Home improvements can reduce how much selling profit applies to your capital gains tax. Home renovations, such as replacing a roof, finishing a basement, or adding a deck, are considered purchases. They are not capital gains.
It would be best if you had your home improvements evaluated. Compare what you paid for the house and the new value of the property. The higher value of the recent evaluation contributes to a lower capital gain when you sell.
Suppose you’ve inherited a home or a property passed down. How do you calculate a capital gains tax rate when you never made a purchase?
Rather than forcing you to face up to the inflation of the original purchase price, your rate only applies to the sale price of the property when you officially took ownership.
For example, if let’s say grandma left you a property in her will. She paid $10,000 for it 20 years ago, but now it’s worth $100,000. If you chose to sell the home, the rate wouldn’t be the difference between $10,000 and $100,000.
Your ownership began at the $100,000 value. The capital gains tax would apply to any changes to the value after that date.
Capital loss, when a depreciation in purchase price occurs, you are also exempt from the capital gains tax.
How Do I Avoid Capital Gains Tax in Florida?
If you’re asking how to avoid capital gains tax in Florida, fear not, the same exemptions we described before apply to you. The IRS (Internal Revenue Service) tax-free $250,000-$500,00 on the sale of primary residences and investing in home renovations can help you get out of capital gains tax in Florida.
Florida taxpayers in a high tax bracket might also consider gifting their property to avoid a capital gains tax. If you’re sure you want to sell, but the capital gains are high, you can give the property to a family member in a lower tax bracket.
A gift is not selling and therefore won’t trigger the tax. With a lower rate, your family member can sell the property without losing as much to taxes.
However, suppose they want to take advantage of the primary residence exemption. In that case, the new owners need to move in for a few years.
If you’re selling a rental property rather than a home, you can avoid paying capital gains with a 1031 exchange. In simple terms, your trading one property for another, not gaining capital from the sale.
A 1031 exchange requires a professional intermediary. The intermediary sells the property while you choose a new property. With the profits from the sale, you can purchase the new property via the intermediary.
Using an intermediary is a guarantee that you aren’t directly receiving any capital from the sale.
Selling a property can be troublesome if you’re unprepared, but the more you know, the higher your chances of saving yourself unnecessary costs. The capital gains tax can put a dent in profits, but you can avoid paying too much. If your plans include the sale of your home in Florida and have yourself set up for the best capital gains tax rate, we buy homes in Gainesville.