What Are Capital Gains Taxes And How Do They Work With Rental Property? (2024)

FAQs

What Are Capital Gains Taxes And How Do They Work With Rental Property? ›

You pay a capital gains tax when you sell a capital asset, such as shares of a publicly traded company or a rental property that you own, for more than you paid for it – plus or minus certain adjustments.

Capital gains tax on a rental property is calculated by subtracting the property's cost basis from the sale price of the property. Your cost basis is the original purchase price plus any improvements made to the property. The total amount is then taxed at the required capital gains tax rate.

Can You Move Back Into a Rental to Avoid Capital Gains Tax? Yes, but you need to have owned it for five years and lived in it for two of those five years. The two years do not have to be consecutive, and you can exclude profits up to a certain amount if you sell it.

Use a 1031 exchange for real estate

Internal Revenue Code section 1031 provides a way to defer the capital gains tax on the profit you make on the sale of a rental property by rolling the proceeds of the sale into a new property.

Since there is no age exemption to capital gains taxes, it's crucial to understand the difference between short-term and long-term capital gains so you can manage your tax planning in retirement.

What is the CGT Six-Year Rule? The capital gains tax property six-year rule allows you to use your property investment as if it was your principal place of residence for up to six years whilst you rent it out.

You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.

Capital gains tax rates

A capital gains rate of 0% applies if your taxable income is less than or equal to: $44,625 for single and married filing separately; $89,250 for married filing jointly and qualifying surviving spouse; and. $59,750 for head of household.

Investments held for less than a year are taxed at the higher, short-term capital gain rate. To limit capital gains taxes, you can invest for the long-term, use tax-advantaged retirement accounts, and offset capital gains with capital losses.

At what age do you no longer have to pay capital gains? ›

For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.

Avoiding capital gains tax on your primary residence

You can sell your primary residence and avoid paying capital gains taxes on the first $250,000 of your profits if your tax-filing status is single, and up to $500,000 if married and filing jointly. The exemption is only available once every two years.

For the 2024 tax year, individual filers won't pay any capital gains tax if their total taxable income is $47,025 or less. The rate jumps to 15 percent on capital gains, if their income is $47,026 to $518,900. Above that income level the rate climbs to 20 percent.

You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.

If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.

What form(s) do we need to fill out to report the sale of rental property? Report the gain or loss on the sale of rental property on Form 4797, Sales of Business Property or on Form 8949, Sales and Other Dispositions of Capital Assets depending on the purpose of the rental activity.