How do capital gain tax works?

Question

I 'm buing a house in Long Island,NY, and currently have a house in NJ, which I will rent for a while, and then maybe sell the Long Island one. Thank you.

Answer 1

If you want to work this so that you don't have capital gains taxes, here's what you need to do. You can shelter gains on the sale of your primary residence if you live in the house for 2 out of the preceeding 5 years before selling it. You can shelter gains up to $250,000 if single and $500,000 if married. If you don't live in the Long Island, NY house you'd have to own it for at least one year to get long-term capital gains treatment, maximum tax rate of 15%.

Answer 2

If you have lived in the property you are selling for 24 of the previous 60 months , there will be an exclusion for a portion (amount depends on single or couple) .
Otherwise , normal capital gains is 15% for items held more than 1 year . . .
But , real estate sales could easily push you into an AMT ( alternative minimum tax ) range where many items are Not allowed for deductions including mortgage interest .

If you are going to sell property , I suggest you read ALL the info on the IRS site or get a CPA certified in real estate and taxation .

http://search.irs.gov/web/query.html?col=allirs&charset=utf-8&qp=&qs=-Wct%3A%22Internal+Revenue+Manual%22&qc=&qm=0&rf=0&oq=&qt=capital+gains

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Answer 3

In short, it should be 15% on the gain. (I am sure your marginal tax rate is more than 20%)

http://www.irs.gov/newsroom/article/0,,id=170634,00.html

And 25% for the rental depreciation that you took already. (It's called recapture.)



The gain or loss on the sale of rental property is reported on Form 4797 , Sale of Business Property. Form 1040, Schedule D , Capital Gains and Losses, is often used in conjunction with Form 4797. For further information, refer to Publication 544, Sales on Other Disposition of Assets,Publication 550, Investment Income and Expense, the Instructions to Form 4797 , Sale of Business Property, and the Instructions to Form 1040, Schedule D, Capital Gain and Losses.

http://www.irs.gov/publications/p544/ch03.html#d0e5481

Section 1250 Property

Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. To determine the additional depreciation on section 1250 property, see Additional Depreciation, later.
Section 1250 property defined. This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. A fee simple interest in land is not included because it is not depreciable.

Section 1250 Property

Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property.
Section 1250 property defined. This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. A fee simple interest in land is not included because it is not depreciable.

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Residential rental property. For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. The percentage for periods before 1976 is zero. Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property.

Here are a few tax facts about capital gains and losses:

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Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040.

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Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.

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Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss.

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The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates. For 2006, the maximum capital gains rates are 5%, 15%, 25% or 28%.

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If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).