Paying to capital gains tax as a result of a profitable sale is one of the most irritating parts of successfully investing in property. With proper legal research, there are ways that you can avoid paying these taxes. Understanding which taxation loophole is best is determined purely by your individual circumstances. With these tax solutions at the time of sale, you will be able to save yourself from a large bill.
Capital gains tax is the tax that the government charges based on the profit made from the sale of your property. The profit is calculated based on the sale price, minus purchase price, minus expenses. The rate this is charged depends on how the property title is held and the amount of profit it has generated.
What is Capital Gains Tax?
An accountant is your best bet when it comes to explaining capital gains tax. However, in the most basic sense, capital gains tax is money owed to the federal government on profits made from selling a home.
In Florida, there is no state income tax payable each year, as there is in other states. But, this does mean that when you come to sell your property, you may be liable at this time to incur to pay a percentage of the net profit in federal taxes.
The percentage of the capital gain tax that you would incur varies based on a variety of factors. As capital gains tax is calculated based on the net profit incurred from the time of the original purchase and the time of sale, it is important that you keep an updated list of expenditure costs, as these are deductible. The percentage that the capital gains tax will be charged is also determined by how long you have owned the property and the names listed on the property title.
As Florida has no state income tax, it means that when you are selling an investment property you aren’t paying state taxes but incurring the federal capital gains.
How do I Avoid Capital Gains Tax When Selling a House in Florida?
Capital gains tax is only payable on a property that is deemed to be an “investment.” Any capital gains are only payable of the net profit aspect following the sale of your property.
It is important therefore that you keep hold of your receipts and can show how much money you have invested in the property. Things such as new windows, doors, flooring, heating system, and extensions are all examples of tax-deductible expenses that could reduce or eliminate your capital gains.
Additional exceptions may also be considered and excluded from any remaining taxable gain following the sale of your property. If you meet within the IRS “unforeseen circumstances,” which can include situations such as loss of your job, divorce, medical emergencies or you are in the military or Foreign Services special considerations may be considered
How do I Calculate Capital Gains Tax?
When it comes to real estate, calculating the capital gains tax payable is based not on the purchase or sale price alone. It is based on factoring in the costs associated with improving the property and adjusting these costs within your calculation.
To work out what your capital gains tax will be charged against you need to follow these steps.
- Take the sale price of your property.
- Work out the adjustments that can be deducted. These adjustments can include costs such as :
- The original costs are attached to the purchase of the property, including the buying price. This also includes additional fees payable such as transfer fees, fees paid to attorneys. It is important that any fees attached to taking out or arranging a mortgage are NOT included.
- Costs attached to the sale of the property. These can include any fees paid to get your property inspected, attorney fees, real estate fees as well as any costs that you incurred getting the property fixed prior to putting it on the market.
- Costs of any home improvements previously completed.
- Total these adjustments up and deduct them from the selling price.
- Deduct any additional allowances or exemptions that you are eligible for.
What is 1031 Exchange?
In real estate, a 1031 exchange is when you are exchanging or moving one investment property for another. By doing this you are able to defer the capital gains taxes.
A 1031 exchange is only permitted for properties that are held for business or investment purposes. In order for the swap to be considered, you must be able to demonstrate and get the Internal Revenue Service (IRS) that this is like-kind. If they agree then the capital gains will be deferred. Being like-kind doesn’t mean that the properties themselves need to be identical. There is flexibility and you can apply for a 1031 exchange even if you are selling a house and considering buying land elsewhere.
The concept is that you are not cashing in on your “investment’ and due to that nature the investment is still in place, it has just been transferred to a different property. When used correctly and in this way, there is no limit as to how often you can apply and do 1031 exchanges.
What is FIRPTA Withholding?
FIRPTA (Foreign Investment In Real Property Tax Act of 1980) is where 10% of the purchase price is withheld from foreign selling from real estate properties located in the U.S. The seller however can make an application to the IRS and apply for a withholding certificate.
The idea behind the certificate is that it indicates that the amount held is tax-exempt. This would be applicable if the account is under $300,000. Or alternative due to reducing the withholding amount, meaning that the disposition held is less than 10%.
It is recommended that you deal with an experienced attorney or accountant, as they will be able to handle the withholding process, safeguard the documentation and apply for the funds to be held in escrow. They are also able to coordinate with an accountant and ensure the application to the IRS is filed in a timely manner and all required information is provided.
FIRPTA is not applicable when the seller is not considered to be a foreign person. In this instance, you can sign an affidavit stating under the power of perjury you are a foreign person.
Are There Exemptions for Capital Gains Tax?
If the property that you are selling is one that has been your main residence for 2 of the last 5 years and you have not sold any other residential properties that you have deducted your capital gains exemption from, you can deduct between $250,000 – $500,000 depending if you are married or single.
If you are not able to utilize the capital gains tax exemption, there may still be alternative options available to you that could be excluded and reduce the level of capital gain tax incurred. If certain conditions are met that have forced the need to move due to change in your health, change of job, or other unforeseen changes that have forced the move, you will be able to look at writing off some of the capital gains tax.
Make Your Next Property Sale Easy with the Right Broker
When it comes time to go ahead and make that next real estate purchase, even with previous experience, it is always handy to use a real estate broker.
It is important that you don’t just use any real estate broker. You are looking at spending a large chunk of money on real estate, the majority of these purchases for the long term. Finding the right real estate broker will be able to assist in determining the valuation of the property you are viewing, be able to advise on the location and where it is likely to hold value, increase or decrease. They are also able to handle and navigate all of the processes and conversations between yourself and the seller. They are able to negotiate the price, negotiate the additional extras and discuss and request any repairs if needed.
Along with their ability to get you the best deal, they are always one step ahead of the online property listings and will be able to make you aware and find you houses and properties before they are listed to the masses and you are in competition for the purchase.
Are you looking to start the process of buying real estate in Florida? We are able to assist in all of your real estate needs. Please request a home guide to understand more and meet our team that can guide you and advise you with finding your property.