Capital gains taxes are applied to any proceeds derived from your real property investments. How much you’ll owe depends on how long you held the asset before selling and your income tax bracket for the tax year.
Below we’ll take a closer look at how to calculate capital gains taxes -- and how to defer them if you’re facing a significant tax burden.
What Will I Owe in Capital Gains Taxes?
Capital gains are profits generated from the sale of real estate investment properties (and stocks, bonds, and similar types of investments). The good news is that some capital gains tax rates are lower than standard income tax rates. The amount you’ll owe on sale proceeds depends on how long the asset has been in your portfolio:
- Assets held less than one year are taxed at a short-term -- and higher -- rate.
- Assets held for a year or more before disposal are considered long-term capital gains.
The holding period is determined from the day you acquired the asset to the day you disposed of it. Let’s take a closer look at short-term gains.
The rate you’ll pay on short-term capital gains depends on your total income and filing status. Here’s a chart for 2020 taxes (data provided by the Internal Revenue Service):
|
Rate |
Filing single |
Head of Household |
Married Filing Jointly |
|
10% |
$0-$9,875 |
$0-$14,100 |
$0-$19,750 |
|
12% |
$9,876-$40,125 |
$14,101-$53,700 |
$19,751-$80,250 |
|
22% |
$40,126-$85,525 |
$53,701-$85,500 |
$80,251-$171,050 |
|
24% |
$85,526-$163,300 |
$85,501-$163,300 |
$171,051-$326,600 |
|
32% |
$163-301-$207,350 |
$163,301-$207,350 |
$326,601-$414,700 |
|
35% |
$207,351-$518,400 |
$207,351-$518,400 |
$414,701-$622,050 |
|
37% |
$518,401 and up |
$518,401 and up |
$622,051 and up |
Long term capital gains for 2020 are taxed at much more favorable rates. Again, the tax rate is determined by your total income and filing status:
|
Rate |
Single Filer |
Married but Filing Jointly |
Married and Filing Separately |
Head of Household |
|
0% |
Under $40,000 |
Under $80,000 |
Under $40,000 |
Under $53,000 |
|
15% |
$40,000- $441,450 |
$80,001- $496,600 |
$40,001- $248,300 |
$53001- $469,050 |
|
20% |
$441,451 and up |
$496,601 and up |
$248,301 and up |
$469,051 and up |
To calculate capital gains, you’ll first have to determine your asset’s basis, or the price you paid plus any taxes and additional funds you’ve reinvested in the property. You can determine your total gain by deducting the sale proceeds from the adjusted basis. A positive number is your gain -- although some investors may be able to offset gains from capital losses incurred in previous years. Example: If you realized $100,000 in gains from the sale of real property but lost $50,000 the year before from stocks held longer than one year, your net gain is $50,000.
Taxes are a complicated arena. Consulting a tax professional prior to disposing of real property can help you better understand the scope of any potential capital gains taxes you might have to pay.
How to Defer Capital Gains Taxes
If you are facing a hefty tax liability after selling an investment property, there are ways you can defer capital gains taxes provided you are willing to reinvest your proceeds back into commercial real estate.
Savvy investors often use 1031 exchanges to defer capital gains and depreciation recapture taxes. If you reinvest your sale proceeds into a like-kind asset of equal or greater value, you can defer any capital gains tax liabilities you might be facing. There are some very important deadlines that have to be met in order to successfully complete a 1031 exchange, so you’ll probably want to get the process started before you dispose of your investment property.
