How To Calculate Cost Basis Of A Home
The cost basis of a home is what you paid for it. Included is the purchase price, certain expenses associated with the home purchase, improvement costs, certain legal fees, and more.
Example: In 2010, Rachel purchased her home for $400,000. She made no improvements and incurred no losses for the ten years she lived there. In 2020, she sold her home for $550,000. Her cost basis was $400,000, and her taxable gain was $150,000. She elected to exclude the capital gains and, as a result, owed no taxes.
States Can Relieve Pressure On Property Taxes
States can couple eliminating or reforming property tax limits with actions to avoid unwarranted increases in property taxes, or in some cases to reduce those taxes States can increase income taxes, especially for high-income residents who have gained the most from rising inequality. Other options include adopting or expanding state inheritance and estate taxes, which typically are paid by the very wealthy closing loopholes that allow profitable corporations to avoid taxes and other steps that ask the wealthy to contribute at least as much of their income in state and local taxes as middle- and low-income families. The additional state revenue could be used to restore cuts in state aid to localities and for future increases in state support for education and other local services.
As noted, federal aid to localities has dropped precipitously since the late 1970s, and the Trump Administration and Republican congressional leaders have proposed additional cuts in areas including education, policing, environmental efforts, and infrastructure. The federal government could relieve pressure on property taxes by increasing, rather than cutting, aid to localities for these types of services and investments.
Capital Gains Tax On Home Sale Example
Consider the following example. Susan and Robert, a married couple, purchased a home for $500,000 in 2015. Their neighborhood experienced tremendous growth and home values increased significantly. Seeing an opportunity to reap the rewards of this surge in home prices, they sold their home in 2020 for $1.2 million. The capital gains from the sale were $700,000.
As a married couple filing jointly, they were able to exclude $500,000 of the capital gains, leaving $200,000 subject to capital gains tax. Their combined income places them in the 20% tax bracket. Therefore, their capital gains tax was $40,000.
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Structure Your Business The Right Way
Eight out of 10 millionaires who are entrepreneurs built their businesses from the ground up, according to a U.S. Trust survey. Only 2% inherited them. Early on, a sole proprietorship is often the best way to limit taxable income. If you lose money at first, you can use losses to offset other income, including capital gains, which is harder to do in a corporation, says certified public accountant Sandy Botkin.
But if you seek liability protection and start generating close to a six-figure income, electing to pay taxes as an S corporationrather than a limited liability company, or LLCcould help you avoid getting killed by self-employment taxes, covering Social Security and Medicare.
Read: How Do I Decide Between a SIMPLE IRA, a SEP IRA, and an Individual 401?
While workers pay only half of their Social Security and Medicare taxestheir employers cover the restthe self-employed are hit with the full 15.3% rate. But an S corp lets you control how youre paid. If your firm earns $150,000, you may opt to pay yourself a salary of $75,000 and take the rest as a so-called distribution of earnings. Youd pay only the self-employment tax on your $75,000 salary. An S corp also avoids the 3.8% Medicare surtax imposed by Obamacare on high earners.
This move would save you more than $7,000 a year, estimates CPA Jeff Cohen, partner at Grassi & Co.: Thats a layup.
How To Avoid Capital Gains Tax On Real Estate
There are many different ways of avoiding capital gains tax on real estate, but those ways are dependent on the type of real estate that one owns. For example, there are certain tax breaks available for a persons primary residence. This is because the capital gains tax can have negative effects on families who have stayed in one home over a long period of time, while it can benefit those who move around. To balance this out there is a Primary residence exclusion that the owner of the home may apply for if the capital gains tax is regarding their residence.
Other ways of avoiding the capital gains tax are:
1. Renovations and Home improvement projects
If you are purchasing a fixer-upper under the primary residence exclusion, you can avoid paying the capital gains tax while at the same time reaping the profits from the house once you sell it.
2. Contributions towards your Roth IRA, 401, and Health Savings Accounts
All three of the accounts mentioned above can provide tax deductions for the contributions that you make in them. Therefore, if you are looking for an easy way of reducing your taxes making contributions in these accounts can be a great way of paying less on taxes and saving more money in the long run.
3. Buy and Hold
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The Bad News About Capital Gains On Real Estate
Your $250,000 or $500,000 exclusion typically goes out the window, which means you pay tax on the whole gain, if any of these factors are true:
The house wasnt your principal residence.
You owned the property for less than two years in the five-year period before you sold it.
You didnt live in the house for at least two years in the five-year period before you sold it.
You already claimed the $250,000 or $500,000 exclusion on another home in the two-year period before the sale of this home.
You bought the house through a like-kind exchange in the past five years.
You are subject to expatriate tax.
Still not sure whether you qualify for the exclusion? Our tool might help otherwise, scroll down for ways to avoid capital gains tax on a home sale:
If it turns out that all or part of the money you made on the sale of your house is taxable, you need to figure out what capital gains tax rate applies.
Short-term capital gains tax rates typically apply if you owned the asset for less than a year. The rate is equal to your ordinary income tax rate, also known as your tax bracket.
Long-term capital gains tax rates typically apply if you owned the asset for more than a year. The rates are much less onerous many people qualify for a 0% tax rate. Everybody else pays either 15% or 20%. It depends on your filing status and income.
Is Avoiding Taxes Legal
Yes and no. Tax avoidance, where you attempt to minimize your taxes, is legal — as long as the deductions you use are allowed. Tax evasion, where you deliberately fail to pay a portion or all of your taxes, is illegal.
File your annual tax returns even if you can’t afford it or don’t think you owe taxes, to avoid trouble. Tax evasion can result in fines and expensive interest on the amount you owe. The IRS could even freeze your bank accounts and garnish your wages until you file and pay your taxes.
Instead of skipping taxes, you should look to minimize what you owe. There are many tax deductions and tax credits you can take advantage of to lower your tax bill. Depending on your eligibility for deductions and credits, you may be lucky enough to eliminate your tax bill completely, but don’t bank on it.
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Gift The Assets To A Family Member
This remarkable option was a total surprise to me. According to Forbes.com, theres no income tax or capital gains tax when you gift crypto to a family member. Neither the donor nor the donee pays tax on the transaction. This allows you to utilize the many tax allowances of your family members, but only with their permission, of course.
So whats the catch? Gifts are supposed to be given in the spirit of a gift, not as a tax convenience. Occasionally, the IRS will deny the tax relief if its obviously not a real gift. Read about the details here, along with other tax-efficient ways to gift your cryptocurrency.
I was interested to note that Forbes considers inheriting property to be better than being gifted property. Not for the donor, it isnt!
Deducting Property Tax Under The New Tax Code
While you have to pay for property taxes, your payments might help you save some money on your other taxes. Property taxes can be deducted from your income for federal taxes if you itemize your deductions.
Taxpayers who itemize their deductions do so because they stand to get more money back than they would if they took a standard deduction. They use a Schedule A form to show how much money they spent on each line item. These items include medical expenses, gifts to charity and state and local taxes . The SALT deduction is currently capped at $10,000.
If you do not itemize your deductions, you can take the standard deduction. In 2021, the standard deduction is $12,550 for individuals, $18,800 for those filing as head of household and $25,100 for married couples filing jointly.
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Limits Have Forced Cuts In Local Services
Constrained by the limits on their ability to raise revenues, local governments and schools have little choice when hitting property tax limits but to cut spending, often with serious consequences for residents.
Michigans two constitutional property tax limits, for example, made it extremely difficult for localities to recover from the Great Recession. Thats largely because one of the limits allows taxable values to fall during recessions but then limits their growth during an economic recovery. This ratchet effect makes it nearly impossible for local revenues to recover even as the economy improves, putting serious strain on local budgets.
Localities responded to these serious challenges in large part by cutting spending for services. One study of spending by Michigan cities other than Detroit found that total spending fell by more than 17 percent between 2008 and 2014, after adjustment for inflation. Every category of services saw declines. For example, the police and sheriff category fell by 13 percent, fire by 14 percent, parks and recreation by 27 percent, and health and human services by nearly 8 percent.
Note: Expenditure values have been rounded to the nearest million. Percent change calculations may not match due to rounding.
Source: Great Lakes Economic Consulting, Michigans Great Disinvestment: How State Policies Have Forced Our Communities into Fiscal Crisis, April 2016. Inflation adjustment by CBPP.
Donate Your Appreciated Cryptocurrency To Charity
There are no taxes associated with donating cryptocurrency to charity. As long as the assets are long-term holdings , the donation can be offset against tax as an Itemized Charitable Deduction. So how does this help?
If you have massive bags of crypto that have 1000xed over the last few years, you can safely donate the correct portion to charity and knock that off your capital gains before its taxed. Theres a sweet spot just the right amount to donate that will save you the most amount of tax. Have a tax accountant look at it or read about it here.
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States And Federal Government Have Exacerbated Localities Problems
State property tax limits might have caused less harm to residents if either states or the federal government had made up for the lost local revenue. But that generally did not happen, sometimes even in states whose limits required the state to make up the lost local revenue. To the contrary, federal aid to localities fell from 8.4 percent of total local revenue in 1977 to 3.8 percent in 2015, while state aid to localities dropped from 30.7 percent of total local revenue to 28.4 percent.
In some states, income tax cuts have left inadequate revenue available to sustain previous levels of support for localities. For example, income tax cuts in Massachusetts led to a 44 percent reduction in unrestricted state aid to localities, after adjusting for inflation. After Maine enacted major income tax cuts, the state scaled back aid for localities, ultimately cutting the amount of aid from 5 percent of broad-based taxes to 2 percent. And income tax cuts in Kansas made it very difficult to restore recession-era cuts in aid to localities, which remains down 14 percent since 2009 after adjusting for inflation.
The failure of state aid to make up for the revenue lost to local property tax limits is evident in the focus states of this report.
Understanding The Differences Between Estate Taxes & Inheritance Taxes
First things first, make sure you know the difference between the estate tax and the inheritance tax. The estate tax, sometimes called the death tax, is money taken by the government from the estate of a recently deceased person before its passed on to their family, friends and other beneficiaries. There is a federal estate tax, while a number of states also levy their own estate tax.
The inheritance tax, meanwhile, is levied on money after it has passed on to an heir. Money can be subject to both inheritance and estate taxes. There is no federal inheritance tax, but a number of states levy inheritance taxes.
The rules for these inheritance taxes vary from state to state. Sometimes the inheritance tax only applies based on the state the heir lives in, though it can also matter what state the person who died was living in as well. Even what state the property, like a house for example, you inherit is in can affect the situation.
There are plenty of strategies to decrease both types of taxes. For more details on how to decrease potential estate taxes, check out this article.
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Use 1031 Exchanges To Avoid Taxes
Homeowners can avoid paying taxes on the sale of their home by reinvesting the proceeds from the sale into a similar property through a 1031 exchange. This like-for-like exchangenamed after the IRS code Section 1031allows for the exchange of like property with no other consideration or like property including other considerations, such as cash. The 1031 exchange allows for the tax on the gain from the sale of a property to be deferred, rather than eliminated.
Ownersincluding corporations, individuals, trust, partnerships, and LLCsof investment and business properties can take advantage of the 1031 exchange when exchanging business or investment properties for those of like kind.
The properties subject to the 1031 exchange must be for business or investment purposes, not for personal use. The party to the 1031 exchange must identify in writing replacement properties within 45 days from the sale and must complete the exchange for a property comparable to that in the notice within 180 days from the sale.
Since executing a 1031 exchange can be a complex process, there are advantages to working with a reputable, full-service 1031 exchange company. Given their scale, these services generally cost less than attorneys who charge by the hour. A firm that has an established track record in working with these transactions can help you avoid costly missteps and ensure that your 1031 exchange meets the requirements of the tax code.
Previous Exemptions From Local Property Tax20132021
Properties purchased in 2013 were exempt if used as yoursole or main residence. If the property was subsequently sold or ceased to beyour main residence between 2013 and 2020, the exemption no longer applied.
Properties that were self-built between 1 January and 1 May2013 were exempt if used as your sole or main residence. If theproperty was subsequently sold, the exemption no longer applied.
Properties that were self-built after 1 May 2013 and before 1November 2021 were not liable for LPT, even if sold again in thatperiod.
New and previously unused properties purchased from a builder ordeveloper between 1 January 2013 and before 1 November 2021 wereexempt even if sold again in that period.
Residential properties built and owned by a builder ordeveloper were exempt if they had not been sold and had not been usedto live in.
Certain properties in unfinished housing estates specified in the Finance Regulations 2013.
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How To Not Pay Capital Gains Tax
Individuals whose taxable income comes below a certain amount are exempt from paying a capital gains tax. Therefore it is best to always check the income requirements for exemption as they change yearly. Another way of avoiding the capital gains tax is by either gifting the amount to a relative, a friend, or donating it to a charity. All of these will lead to a tax exemption for that amount. If the property is your primary residence, you will also be able to apply for a capital gains tax exemption.
What If You Cant Pay Your Property Taxes
Property taxes, mortgage payments, utilities and more the list of expenses for your home can be overwhelming, and property taxes might seem like a cost you can skip if youre strapped for cash. However, paying your property taxes is just as essential as every other bill for your home, and ignoring them can result in a lien on your property, fees piling up and possible foreclosure.
If you cant afford your property taxes, contact your lender or servicer as soon as possible to discuss the situation, says William Heyman, a real estate attorney at Heyman Law Firm in Maryland. Some lenders have programs that can help homeowners pay their taxes over time.
Other options include borrowing money from friends or relatives or tapping your homes equity. If youre age 62 or older, another possible solution is a reverse mortgage, where a lender makes monthly payments to you against the value you have in the home.
If they have equity in their house but are unable to pay their taxes, they should consider refinancing and using that money to pay their taxes, although this is not a long-term solution, Heyman says. If their situation is bad enough, they should consult with a bankruptcy attorney.
For those who inherited a house with hefty property taxes, some jurisdictions offer programs to assist, Heyman points out.
When in doubt, talk to a professional either an accountant, an attorney or a counselor who can guide you through the often-confusing world of taxes.
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