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Capital Gains tax planning

Capital Gains Tax Review

With tax season in full swing, its a good time to do a quick review on the capital gains tax and what happens when you sell your home. 

When you sell your property for more than what you paid for it, you have a "capital gain" that could be subject to the capital gains tax. The current tax rate for capital gains on a federal level is anywhere from 0% to 20%, depending on your level of income. You may also be subject to an additional 3.8% "net investment income tax."

However, if you've lived in your house as your primary residence for two full years out of the past five years, you may be able to sell your house without paying any capital gains tax or net investment income tax. The primary residence capital gains tax exclusion is $250,000 for single taxpayers and $500,000 for married couples filing a joint tax return. House prices have increased so much in the past several years that many homeowners are at or above their cap.

For example, assume you currently have $500,000 of tax-free capital gains that you could get by selling your house today. If you wait to sell, and your house value increases by another $100,000, you may have to pay up to 23.8% in federal capital gains and net investment income tax on that extra $100,000, plus whatever state taxes you may owe.

But, lets say you will be over your allowable exclusion (250k for a single person and 500k for a married couple) and you have a choice to sell this year or next year. If you are retiring at the end of this year, maybe it would be wiser to sell your property next year because your income for next year will be lower and therefore your "gain" will be taxed at a lower rate?

I know just enough about taxes to be dangerous so please check with your CPA before making a major decision like this.

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