In simple terms, if you sell an asset for more than the amount you bought it for, the net profit is understood as a capital gain. For example, if you pay $5,000 for a stock investment and sell it for $6,500, the $1500 profit you earned is a capital gain.
Capital Gains Are Subject To Taxes Referred To As Capital Gains Tax.
Today we will provide you more details about capital gains tax and IRS approved strategies to avoid or minimize them in 2020.
Short-Term Vs. Long-Term Capital Gains
The IRS has two separate categories for capital gains.
- Short-term Capital Gain
- Long-term Capital Gain
If you sell an asset that you have owned for one year or less, it is subject to short-term capital gain. Long-term capital gain happens if you have held an asset for at least a year.
In both cases, a capital gain is described as the net profits from the sale of the asset. Transactional costs, like sales commissions and related fees, must be taken into account while calculating your capital gains.
Long-Term Capital Gains Tax Brackets In 2020
Long-term capital gains bear lower tax rates of the two types. As per the total taxable income of the taxpayer, long-term gains are calculated at rates of 0%, 15%, or 20%.
For the tax year, 2020 (the tax return you’ll file in 2021), below mentioned are the three capital gains tax income tax brackets for different tax filing statuses. These figures denote taxable income, not adjusted gross income (AGI) or gross income:
Data Source: IRS
It’s also worth considering that these capital gains tax rates are only the federal income tax you might have to pay. You might also need to pay capital gains taxes to your state as well.
Short-Term Capital Gains Tax Rates In 2020
Short-term capital gains are taxed as ordinary income. In other words, they’ll be taxed according to the regular income tax brackets that apply to earned income. These rates range from 12% to 37%. Though there are seven marginal tax brackets for regular income compared to only three for long-term capital gains taxes, long-term rates are mostly lower than the corresponding general income tax rates.
The Net Investment Income Tax
In addition to the regular tax rates on both long and short-term capital gains, many higher-income taxpayers are needed to pay an additional 3.8% net investment income tax. This tax funds the Affordable Care Act and applies to any income from investments — including interest income, capital gains, investment property rental income, dividends, and more.
The net investment income tax applies to any income over the following limits that came from investments:
- $250,000 for joint tax filers
- $200,000 for single filers
For example, in case of joint filing – if you and your spouse earned $280,000 from your jobs, and you also had $30,000 in investment income from bond interest and stock dividends. In this case, your net investment income tax will be calculated on the $70,000 of the investment income that brings your total over the $250,000 threshold.
Do You Have To Pay Capital Gains Tax On Real Estate Sales?
Real estate is considered the backbone of the economy. Therefore it is subject to a few exceptions, specifically when it comes to primary residences.
Primary Residence Exclusion. This allows taxpayers an exclusion of $250,000 in net profits from the sale of their primary home. Married couples filing a joint tax return are exempt up to $500,000 from capital gains taxation. For example, if you and your spouse purchase a home for $600,000 and sell it for $950,000 years later, none of the profit will be eligible for taxes.
Is There Any Specific Exemption For An Investment Property?
Yes. 1031 Exchange was introduced to promote investment in the real estate market and to support investors to put their money back in the system. 1031 Exchange allows you to defer the capital gains tax on the trade of a property if you reinvest it in another like-kind property. However, guidelines laid down by IRS must be met to achieve a successful exchange.
The asset needs to be held for a year or longer to be eligible for the long-term capital gains tax rate as it is significantly lower than the short-term capital gains rate for most assets. A qualified intermediary usually handles the gains from the initial sale and securely retained into a trust. The investor gets 45 days to identify suitable like-kind replacement properties and to notify the IRS. The “reinvestment” or acquisition of the chosen properties must take place within 180 days of the sale of the initial property. If any of the guidelines laid by the IRS are not met, the money in the trust will be subject to the appropriate capital gains tax.
Engage Our Services For A Profitable 1031 Exchange And Defer Capital Gains Tax
1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature, and it would be wise to seek guidance from expert professionals.
