Capital Gains Laws and Rules for Luxury Homes in Los Angeles

“What is Capital gain?”… You might ask. I would simplify it this way by giving this scenario: You acquire a property and later sell it out to a buyer in order to get gain (profit) from the sale, then, that is capital gain. Capital gains is the profit from sale of capital assets such as mutual fund shares, bonds, real estate and so on. This is taxed by the government through the Internal Revenue Service. Therefore, it will be very beneficial to have an in-depth knowledge of Capital Gains Laws and Rules because it will help you in reducing tax liability on these kinds of transactions.

Real estate is taxed either in the form of long term capital gain or short term capital gain. This depends on the purpose for which the property will be used. There are different rates for the long term and the short term.

In the case of the short term, the rate is within the range of 10% – 35%; while that of the long term is totally different. For the long term capital gains, assets that are older than one year i.e. assets that have been acquired for over a year have a varied rate; while other types of assets have rates that are dependent on the range of income tax the owner falls into.

If the owner’s income as well as the capital gains falls under the 15% range, then it is likely he/she qualifies for a 0% rate. If the owner has an income within the “25% and above” bracket, then the property (ies) will be charged.

Is there any form of capital gains on rental properties? Yes there is also a tax on rented properties. This falls under “DEPRECIATION RE-CAPTURE TAX RATE.” What this means is that there is a consideration on the part of the government that that property is to be used to make profit, but still considers that the building will depreciate as time goes by when the tax is calculated.

There are several factors used in determining the computation of the gains or losses incurred from sales of property (ies). Some of which include the rate of depreciation, the selling price, improvements later made on the property, and others. The depreciation re-capture rate applies to the total amount, but the capital gains apply to the left over after depreciation is considered.

How about capital gains tax on home sales? It should be noted that profits made from a property that is termed “Primary Residence” can be excluded from any form of capital gains. The exclusion could be as much as $250,000 for single owners, while for married couples; it could be up to $500,000.

Not every property can qualify as a primary residence. There are requirements which must be met; and they include:

(a)  In the past 5 years before the property is sold, the owner must live in the house for at least for 2 years.

(b)  It doesn’t matter if the 2 years out of the 5 years is consecutive or not.

(c)  Property mortgage rate doesn’t affect your qualifying for it.

Well, if you lived on the property for less than 24 months, there could be exclusion if the owner had to relocate due to unforeseen circumstances or due to work.

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