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To calculate your real estate capital gains, you need to subtract the property's adjusted basis from the selling price. The adjusted basis is the original purchase price plus any improvements made to the property, minus any depreciation taken.

Let's consider an example to illustrate the calculation of real estate capital gains:

You purchased an investment property three years ago for $200,000. 

During your ownership, you made $20,000 worth of improvements to the property. 

You recently decided to sell the property for $300,000. 

However, you incurred $10,000 in selling costs, including real estate agent commissions and closing fees.

Calculation: To calculate the real estate capital gains, taking into account the selling costs, follow these steps:

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1. Determine the adjusted basis: 

Adjusted basis = Purchase price + Improvements Adjusted basis 

$220,000 =           $200,000         + $20,000 

2. Calculate the capital gains: 

Capital gains = Selling price - Adjusted basis - Selling costs Capital gains 

Capital gains =  $300,000     - $220,000        - $10,000 

Capital gains = $70,000

In this example, the real estate capital gains amount to $70,000, considering the selling costs. We have include all the things you can call improvements (not Repairs)  

Deducting Home Improvements from Home Sale Profit for example:  

• adding on to the home, a new bedroom, bathroom, or garage 
• replacing walls and floors
• installing new pipes, or duct work 
• new or upgraded heating and air conditioning system 
• new fences, retaining walls, porches, patios, or decks
• replacing driveways and walkways
• installing a new roof, windows, or doors 
• installing new wall-to-wall carpeting
• installing new built-in appliances.

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Real estate capital gains are subject to taxation by the Internal Revenue Service (IRS). The tax rate you pay on your capital gains depends on several factors, such as your income level, the duration of property ownership, and whether the gains are short-term or long-term.

Since you had the property for 3 year and lived in the home you get the $250,000 Exclusion per the IRS. Read more about the requirements below. (Qualifying for the Exclusion)

Let's break down the tax implications of the example, assuming a 15% tax rate on long-term capital gains:

Example in you fall into the 15% Long term Capital Gain rate that most be do. 

Real estate capital gains: $70,000 Tax rate on long-term capital gains:

Calculation:  Capital gains * Tax rate Tax liability       = Tax liability 

                         $70,000    *   0.15      Tax liability      =  $10,500

In this example, with a 15% tax rate on long-term capital gains, the tax liability for the real estate capital gains of $70,000 would amount to $10,500.

 Don't forget the personal exclusions if you lived the home the 2 of the last 5 years. 

Real estate capital gains - Single personal Residual exclusion = Taxable capital gains

  $  70,000                      -  $250,000 Exclusion =  Taxable capital gains = Which is $0

In this example, with a single personal exclusion of $250,000, the taxable capital gains would be $0. This means that you would not owe any capital gains tax on the sale of the property, as it falls within the exclusion limit.

The single personal exclusion allows individuals to exclude a certain amount of capital gains from the sale of their primary residence, subject to meeting specific criteria. 

It's important to consult with a tax professional to ensure eligibility and accurate calculations based on your specific circumstances and the most up-to-date tax regulations.

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For the 2023 tax season, the 0% rate on long-term capital gains – any asset held for longer than a year – can be applied to taxable income of $41,675 or less for single filers and $83,350 or less for married couples filing jointly.

That means the 0% rate is higher than it appears: It is based on taxable income, which is calculated by subtracting the standard deduction from your adjusted gross income or itemizing deductions.

The standard deduction for single filers in 2023 will be $12,950, and for joint filers, it will be $25,900.

That means the rate applies to a minimum of $57,575 for individuals and $109,250 for married couples.

Let's calculate the tax liability for an example taxable income of $50,000:

1.   For the first $11,000, the tax rate is 10%. So, the tax on this portion is $11,000 * 0.10 = $1,100.

 2.  Next, we calculate the tax for the income between $11,001 and $44,725. The amount in this bracket is $50,000 - $11,000 = $39,000. The tax on this portion is $1,100 + ($39,000 * 0.12) = $1,100 + $4,680 = $5,780.

 3.  Finally, we calculate the tax for the income between $44,726 and $50,000. The amount in this bracket is $50,000 - $44,725 = $5,275. The tax on this portion is $5,147 + ($5,275 * 0.22) = $5,147 + $1,160.50 = $6,307.50.

The total tax liability would be $1,100 + $5,780 + $6,307.50 = $13,187.50.

Despite the fact that long-term capital gains at lower income levels may be tax-free, they are still income for tax purposes, not only to determine the tax bracket to be applied to but also to determine state income taxes (which may not be 0%! ), 

Adjusted Gross Income (AGI) and any tax-related adjustments or thresholds based on AGI, as well.

According to the Internal Revenue Code, ordinary income is applied first to fill the bottom tax brackets, then long-term capital gains are added.

Those tax deductions are applied to ordinary income first and then to long-term capital gains directly. 

 In this chart, the tax brackets represent different income ranges, and the "Ordinary Income Applied" column indicates that ordinary income fills up each tax bracket from the bottom up until the corresponding limit.

 Any remaining income falls into the highest tax bracket. The "Long-Term Capital Gains Applied" column indicates that long-term capital gains are applied after ordinary income has filled up the tax brackets. 

After ordinary income has been reduced to zero, those deductions are applied to long-term capital gains directly.

This is actually the best sequence, since ordinary income (which would otherwise be taxed at the highest rate) gets the lowest brackets; however, even though long-term capital gains get pushed into the higher brackets because long-term capital gains are already eligible for preferential tax rates, they still result in the greatest tax savings.

0% rate only applies as long as the income actually does fall within those lower brackets – which means “too much” in capital gains will eventually cross out of the 0% rate and into the higher tax brackets.

United States are governed by the Internal Revenue Service (IRS) and can be summarized as follows:

1. Ownership and Use: To qualify for the capital gain exclusion, you must have owned and used the property as your primary residence for at least two out of the five years preceding the sale. The two years of ownership and use do not need to be consecutive.
2. Frequency: The capital gain exclusion can generally be claimed once every two years. This means that if you sell a property and qualify for the exclusion, you must wait at least two years before being eligible to claim it again on another property.
3. Exclusion Amount: For individuals, the maximum capital gain exclusion is $250,000. Married couples filing jointly can exclude up to $500,000 of capital gains from the sale of their primary residence. To qualify for the higher exclusion amount, both spouses must meet the ownership and use requirements, but only one spouse needs to satisfy the ownership requirement. This is why Divorce Matters. 
4. Eligible Property: The capital gain exclusion applies to the sale of a primary residence, which is typically the home where you live most of the time. It can include various types of dwellings, such as houses, apartments, condominiums, mobile homes, and even some houseboats, as long as they meet the ownership and use requirements.
5. Proportional Exclusion: If you do not meet the ownership and use requirements due to certain unforeseen circumstances, such as a change in employment or health reasons, you may still be eligible for a partial exclusion based on the time you did meet the requirements.

Read more here from the IRS.

Short-term capital gains occur when a property is held for one year or less before being sold. These gains are taxed at your ordinary income tax rate. On the other hand, long-term capital gains arise from properties held for more than one year and are subject to lower tax rates.

Short-term capital gains are profits from the sale of an asset that has been held for one year or less. These gains are generally taxed at the ordinary income tax rates, which vary based on your income level and tax bracket. 

For most individuals, the short-term capital gains tax rates align with the ordinary income tax rates, ranging from 10% to 37%. 

Long-term capital gains arise from the sale of assets that have been held for more than one year. The tax rates for long-term capital gains are typically lower than those for ordinary income and short-term gains, providing potential tax advantages for investors. The long-term capital gains tax rates are as follows:

0%, 15% and 20%, as well as a 3.8% (NIIT) Medicare surcharge imposed on the wealthiest Americans. (see below)

 For the 2023 tax season, the 0% rate on long-term capital gains – any asset held for longer than a year – can be applied to 

0% Long Term Capital Gains 

taxable income of $44,625 or less for single filers and  $89,250 or less for married couples filing jointly.

That means the 0% rate is higher than it appears: It is based on taxable income, which is calculated by subtracting the standard deduction from your adjusted gross income or itemizing deductions.

The standard deduction for single filers in 2023, will be $12,950, and for joint filers, it will be $25,900.

That means the rate applies to a minimum of $57,575 for individuals and $109,250 for married couples.

Despite the fact that long-term capital gains at lower income levels may be tax-free, they are still income for tax purposes, not only to determine the tax bracket to be applied to but also to determine state income taxes (which may not be 0%! ), 

(NIIT) is a tax that applies to certain investment income, including rental income, interest, dividends, and capital gains, among others. It was introduced as part of the Affordable Care Act and is designed to help fund Medicare and the Affordable Care Act provisions. NIIT is imposed in addition to any other applicable income tax.

When it comes to the sale of a property, including rental homes, NIIT may be applicable if you meet the following criteria:

1. Net Investment Income: NIIT is levied on the "net investment income" of individuals whose modified adjusted gross income (MAGI) exceeds certain thresholds. 

•  $200,000 for single filers and heads of household
•  $250,000 for married couples filing jointly
•  $125,000 for married couples filing separately

Capital Gains: If you realize a capital gain from the sale of a rental property and your MAGI exceeds the applicable threshold, the capital gain will generally be considered part of your net investment income. Consequently, it may be subject to NIIT.

To help you better understand and plan for your capital gains tax liabilities, we have developed a powerful tool - the Capital Gains Calculator. 

This intuitive calculator allows you to input the relevant details of your capital gains, including the type of asset, purchase price, sale price, and holding period. 

With just a few clicks, it provides you with an estimate of your capital gains tax obligation.  By using the Capital Gains Calculator,

When you sell an investment property, depreciation recapture is usually the first tax bill you have to pay.

Most investment property can be depreciated over a period of 27.5 years, or 3.636% per year. 

Determine the annual depreciation amount: 

Annual depreciation = Initial value * Yearly depreciation rate Annual depreciation 

  $14,544                 = $400,000 * 0.03636 Annual depreciation

Calculate the accumulated depreciation over a specific period: Let's consider a period of 10 years:

  $14,544 * 10 years Accumulated depreciation = $145,440

In this example, over a period of 10 years, the accumulated depreciation for the property would amount to $145,440.

Each year, investors can use this depreciation to lower their taxable income. However, when they sell the investment property, the IRS gets these savings back.

Regardless of whether you claim depreciation, if you make a profit over the depreciated value, you will be required to pay 25% of the overage as depreciation recapture tax. 

Any profit above this amount will be taxed at the lower capital gains tax rate.

Depreciation recapture = Accumulated depreciation * Recapture tax rate  

Depreciation recapture =  $145,440                          * 0.25  

= $36,360

In this example, the depreciation recapture tax at a rate of 25% would be $36,360.

Can you avoid Texas capital gains if you reinvest in real estate?

This is known as a 1031 exchange. It does not eliminate taxes but defers them to whenever you sell the property that the capital gain is reinvested into. (not really for personal residence)

Depreciation recapture is a tax provision that comes into play when you sell a property or asset that has been depreciated for tax purposes. 

As an accounting method, depreciation allows you to deduct the cost of an asset over its useful life. The IRS may, however, "recapture" or reclaim a portion of the tax deductions you previously claimed if you sell the asset for a gain.

You can make informed decisions regarding your investments and tax planning strategies. To explore the calculator and gain valuable insights into your capital gains tax, click here. 

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You can reach both Scotty Gifford and Amber Gifford at The Gifford Group.net

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