When selling an investment property, it is essential to know that the sale can affect your tax obligations more than the capital gains. One of the most frequent questions that people ask when they contact Realized is:
Are long-term capital gains included in the Adjusted Gross Income (AGI)?
This answer is yes, and it is crucial to understand how it works, especially when trying to control your income, reduce your tax burden, or even be eligible for other financial benefits.
Here's some helpful information.
Understanding AGI: The Starting Point for Your Taxes
AGI is an individual's gross income, including wages, business income, rental income, and dividends, minus certain above-the-line deductions, such as retirement contributions, health savings account contributions, and student loan interest.
Your AGI helps determine:
- Whether you are eligible for some deductions and credits.
- Your tax bracket for regular income.
- The amount of taxes you must pay, such as the Net Investment Income Tax (NIIT).
- The amount of your Social Security benefits that are subject to taxation.
- Your Medicare premiums.
AGI is the basis of your tax return, and any increase can impact other aspects of your finances.
How Capital Gains Affect AGI
Long-term capital gains are taxed as part of the AGI.
When you sell investment properties, stocks, real estate, or other capital assets and earn a long-term capital gain (you have had the asset for more than a year), the gain is included in your income and in your AGI.
However, there is an important consideration regarding this gain that it is added to the AGI, but it is taxed differently than the ordinary income:
- Ordinary income (wages, rent, etc.) is taxed according to your tax rate.
- Capital gains from the sale of long-term investments are taxed at favorable rates of 0%, 15%, or 20%, based on your tax income.
In other words, long-term capital gains can increase your AGI, but the gains are taxed at lower rates.
Why This Matters for Investment Property Owners
Investment property owners selling their assets and generating significant gains may increase their AGI substantially. This could trigger:
- Medicare premiums increase (IRMAA surcharges).
- Higher rates of the 3.8% Net Investment Income Tax.
- Phaseouts of deductions and credits based on income.
- Tax benefits that are available based on AGI thresholds may be lost.
For example, the Net Investment Income Tax applies to individuals with modified AGI of $200,000 or more for singles and $250,000 or more for joint filers.
How Realized® Helps Investors Navigate This
At Realized®, we work with property owners and their advisors to explore potential strategies for managing the tax implications of real estate transactions. Whether it is through a 1031 Exchange to defer the gain, an Opportunity Zone investment to potentially pay less taxes in the future, or a diversified passive income portfolio that is tailored to your risk tolerance, our team is dedicated to working towards your goals.
This is where understanding the capital gains of AGI is an important step in evaluating the broader tax and investment picture—particularly when looking to preserve equity or manage long-term real estate exposure.
Are you planning to sell a property or thinking of a 1031 Exchange?
Contact the Realized team today and learn more about tax-efficient solutions for your specific investment objectives.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
