What is Capital Gains Tax and Why Should You Care?

It’s widely assumed that the only individuals who ever see capital gains charges are wealthy people. This is a misleading statement, and simply can’t be true. Indeed capital gains could affect anyone, including you, and make your taxes much more complex than they used to be. So, whether you’re intending to use TurboTax® or an accountant this year, be sure to have an idea of capital gains and how much you might have to pay in the event that your investment makes a profit. 

What Are Capital Gains? 

A capital gain is something a person gets when they sell something for more than they spent to purchase it. In this way, a highly valued comic book that your 14-year-old son bought by accident could see a capital gain. However, it’s more likely to occur for investments, which is where the popular misconception that capital gains only affect the wealthy comes from, as they often have more assets to put into investment opportunities than your everyday joe does. So what does capital gains really affect?

Not Home Ownership

Home ownership is widely acknowledged as one of the biggest assets anyone has. If the real estate market is in the seller’s favor at the moment you sell your house, you could stand to make an exponential profit on your home, but you likely won’t be held responsible for a capital gains tax on it. To make sure that profit isn’t taxed heavily, you’ll have to meet three major conditions in order to avoid it. 

First, you’ll need to have owned the home for at least two years before you sold the house. Second, you’ll also need to have used this home as a primary residence for those same two years. The third condition is that you haven’t tried this before, at least, you haven’t done it in that last two years, prior to moving into this home. So, if you’ve been moving from home to home on a timeline of about every five to 10 years, you should qualify for excluding the profit gain from capital gains on the property. At least, you’ll be able to exclude $250,000 of the profits from additional taxes, which would be $500,000 to exclude if you’re filing as married. 

If You’ve Owned The Property For Some Time

Depending on how long you owned the property for, your taxes will either be classified under long-term capital gains or short-term capital gains. This determines the level of tax you’ll actually end up paying on the profits once you’ve sold it. If you’re selling after owning the property for more than a year, it’s considered long-term capital gains. If you’re selling a property you’ve owned for less than a year, then you’ll owe short-term capital gains, instead. Short-term gains are significantly larger than long-term capital gains, in fact, they ring in at about 10-20% higher than the long-term capital gains. If, however, you’re in the lowest tax bracket, you won’t end up paying capital gains at all.

Can You Avoid Capital Gains Entirely? 

In some special cases, yes, you can avoid capital gains. Specifically, a 1031 exchange can protect you from having to pay capital gains at all. This functions as a way to sell investment property through a specific set of steps, which ensures that the proceeds from the sale all go back into real estate investment immediately. You can apply this law to rental properties of all kinds and even raw land. If you’d like, you can put the entire profit amount back into an investment, or you can put only half back into an investment. Whatever you decide, only the amount that you don’t immediately reinvest will have capital gains put on it. This can be an efficient way to draw out the payment of capital gains and avoid needlessly losing your money when you’re saving for something big, like retirement, through these means. 

Find Out More About DTS Investments Now

At Archer Investment Advisors, we’re passionate about creating investments that are lucrative for all parties and help you carefully navigate your tax situations. That’s why we offer DTS investments that allow you to invest in property far above your means to start earning a profit on your investment funds. If you’re curious about how a DTS works, don’t hesitate to reach out to us. We’re always eager to explore your options with you and find investments that fit your needs exclusively. Schedule an appointment today.