Happy Monday! Over the weekend I had the pleasure of speaking at a First Time Home Buyer event about how insurance and planning tie into your overall goal of purchasing your first home. A lot of people were surprised when we talked about capital gains taxes, so I thought it’d be a good idea to talk about it with all of you.
When you sell, or have been deemed to dispose of, certain capital property (things like real estate, securities like stocks, bonds, etc.) you have what’s called a capital gain. 50% of the gain on the property (the gain is the proceeds of the sale or the fair market value of the property less the purchase price and outlays/expenses of the sale) is taxable at your marginal tax rate.
Let’s look at a simple example:
-You have properties that were purchased for $1,000,000
-You sell them for $2,500,000
-Your capital gain is $1,500,000 ($2.5 – $1M)
-Your taxable capital gain is $750,000 (50% of the capital gain)
-Approximately $375,000 would be owed in taxes ($750k taxed at 50%)
Your principal residence is exempt from capital gains taxes, but any properties in addition to your principal residence would have capital gains taxes owed, either on the sale of the property or at death. At death, the property is deemed to have been disposed of on the date of death at the fair market value. These taxes must be paid before the properties can be passed to the beneficiaries.
So, make sure that if you are investing in real estate today, you understand the taxable implications of it. Check out my post next week, where I will go over your options on how to pay capital gains taxes on death, and what is the best (cheapest) way to do it!