Dallas homeowners pay property tax every year and may have a good idea of how tax law works and the deductions they can take. However, one area that seems to be gray for people selling their primary residence is the real estate capital gains tax.
Before you sell your home and being to make plans on how much you’ll be receiving or how heavily you may be taxed, it is important to understand the basics of how this specific real estate tax works.
What is Capital Gains Tax?
Before even looking at capital gains tax, it is detrimental that you understand what capital gains actually is. Capital gains is when you sell something that you own for more money than you initially purchased it for.
This is typically seen when a Dallas county homeowner sells an asset like their home. Other forms of capital gain include:
- Sale of a business
- Sale of stock shares
- Sale of land
Real estate capital gains is the amount that is incurred after the sale of the actual real estate (not stock shares). This capital gain kicks in when an owner goes on to sell their home and discovers that the value of the home is higher than when it was purchased.
Long-Term Capital Gains Vs. Short-Term
One learns how high their tax rate on their real estate is after it is determined which type of capital gains they will earn.
Short-term capital gains rates are reserved for homeowners who are selling the property after living on site for 12 months or less. This rate is equal to your normal income tax rate.
Long-term capital gains kick in when the person has owned the home for longer than a year. This tax rate is generally lower than short-term rates. However, recent tax law brings about the potential for the rates to be higher than usual.
How is This Tax Calculated?
Many people assume that the gain is the profit they make on the sale. The reality is that the gain can be so much more than this. The help of a property tax consultant will be able to open your eyes to how this tax is calculated and where your capital gains tax rates stand.
The general equation for capital gains is the home’s selling price, minus selling cost, deductible closing cost, and the owner’s tax basis on the property.
Is All Property Taxed the Same?
One misconception that many people have is that the higher your property sells for the more you will be taxed. This is not true because the property being sold really depends on how it is used. For example, a property that is rented out will not be taxed the same as a primary residence.
The Hegwood Group is the Tax Team That Helps You Understand Your Capital Gains Tax
Understanding complex taxes like real estate capital gains tax can be confusing to the average individual. At the Hegwood Group, we do so much more than help people with their property tax bill. If you have any questions about capital gains and the tax that comes with it, contact us today to schedule an appointment to speak with one of our experienced team members.