Have you been watching the news lately? Then, you have undoubtedly heard about President Joe Biden’s new proposal to increase the tax on long-term capital gains.
He has promised that this will not affect people making less than $400,000 a year. But, some finer points of his plan have not been defined. Also, the selling of property could have a negative impact. In this post, I will address both issues.
Long-term capital gains on assets held over one year are taxed at a maximum federal rate of 20% plus a 3.8% Medicare surtax. President Joe Biden’s reported proposals would almost double the top rate to 43.4%
For those with an income of over $1 million per year, long-term capital gains would be taxed at ordinary income tax rates. Under Biden’s plan, the highest tax bracket would be 39.6% (up from 37.0%), and the Medicare surtax of 3.8% would still apply.
So It’s Complicated If You Are Planning to Sell
This new proposed tax gets complicated because this new capital gains tax may affect people who plan to sell a house with a larger profit margin.
Many sellers already avoid paying capital gains on home profits because of a tax break. Single taxpayers can subtract up to $250,000, while married filers may qualify to exclude up to $500,000. Please note, it must be the seller’s primary home for two out of five years before closing on the sale. And, this is with a few exceptions. Any amount more than those thresholds is subject to capital gains taxes.
Home sales in high-activity markets could push sellers over the 1-million-dollar threshold.
Seattle, Tacoma, and even Gig Harbor have seen historic rises in prices. If someone bought a home in the ’90s for $200,000 that sells for 1.5 million, they would have to pay this higher capital gains tax.
The good news is that with a little planning, this extra tax can be abated or minimized.
We Work with Real Estate Investors
Since I work with many real estate investors, we try to make sure we use tax-loss harvesting on rental properties. This uses some investment losses to offset gains.
Sellers should also consider home improvements or renovations to increase the home’s original purchase price. This could offset the amount that would be subject to this tax increase.
There isn’t space here to go into all of the intricacies of this planning, but please don’t hesitate to contact us if you have any questions or concerns.
