How US Real Estate Capital Gains Tax Works
US real estate draws investors from around the world. Rental properties can be a great way to make passive income. There is also a solid profit potential when selling properties. However, selling property comes with concerns about paying US real estate capital gains tax.
Capital gains tax is a type of tax the IRS levies on profits from the sale of capital assets, including real estate. If you are a foreign investor, you would be exempt from most capital gains taxes, but this exemption does not apply to real estate sales.
As always, please consult a tax professional for your tax implications regarding real estate.
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The Basics of US Real Estate Capital Gains Tax
Capital Gains Tax Rates
Capital gains tax only covers the profit of a sale. Before calculating the amount you would pay, you must subtract the cost basis from the sale price. That will tell you the amount subject to capital gains tax.
After that, a few factors can determine the tax rate that will apply to your profits. These factors include your current tax bracket, the time you’ve held the property and marital status.
If you purchased the property less than a year ago, it is a short-term capital gain. However, if you have held it for longer, it is a long-term capital gain. The taxes on long-term capital gains are generally lower. For short-term capital gains, the rates range from 10-37%. With long-term capital gains, the rates range from 0-20%.
It is essential to note that there are special property classes and transactions the IRS may tax differently. These are also rates for 2022, so they could change in the future.
Exemption for Primary Residences
Another important consideration is whether you live in the home. A significant exemption could apply if the property qualifies as your primary residence. However, there are rules to qualify for you to claim the home as your primary residence. Specifically, you must be a resident and live in the home as your primary residence prior to the sale.
If you are eligible for the exemption, it could exclude the first $250,000 of profit from capital gains tax. For a married couple, the exemption doubles to $500,000.
Foreign investors will also need to consider FIRPTA withholding. Investors should consult a local tax professional with experience helping foreign individuals. A knowledgeable tax professional can help investors minimize their taxes on US real estate investments.
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