Anytime we are helping a single person, married persons, or investor the conversation of capital gains inevitably arises. We've heard a lot of different scenarios why people think they either have-to pay capital gains - because their cousin Vinny told them they do - and it's actually relatively simple to explain.
Here are some questions we've had regarding real estate, selling, and paying capital gains taxes and some simple, straight forward answers.
Question: What are Capital Gains Taxes?
Answer: When a property is sold and there are long term gains on that property then those long term gains are taxed as Capital Gains.
Though there are some differences and inevitably questions arise differentiating between a Primary Residence and an Investment Property.
Question: When I sell my Primary Residence do I have to pay Capital Gains?
Answer: The answer is two-fold.
No. When selling a primary residence the seller(s) is not required to pay capital gains taxes on the proceeds of the property sale.
However, if you're selling a property and net over a certain dollar amount than the answer is Yes.
Question: I'm a single person, when do I have to pay Capital Gains on my Primary Residence?
Answer: Owning a primary residence as a single person then you will have to net over $250,000 on the sale before having to pay capital gains on the overage.
Question: We are married persons, when do we have to pay Capital Gains on a Primary Residence?
Answer: Owning a primary residence as married persons then the capital gains limit is increased to $500,000 before having to pay capital gains on that overage.
Question: I've heard of a 1031 Exchange. What are 1031 exchanges?
Answer: A 1031 exchange, or a 1031 tax deferred exchange, is when a real estate investor sells a investment property and defers the taxes made on the gains from that sale into a like-kind property. There are a lot of mechanics to a 1031 exchange yet the goal is to defer paying taxes in the short term.
To read more about property sales and capital gains taxes then visit the IRS's website at https://www.irs.gov/faqs/capital-gains-losses-and-sale-of-home/property-basis-sale-of-home-etc.