WHAT YOU OWE AFTER SELLING A HOME IN THE DISTRICT

Quick Answer: Only your tax professional knows for sure!

Capital Gains and losses in the District of Columbia are treated the same as they are under federal law. All realized capital gains are taxed, a deduction of up to $3,000 for net capital losses is allowed, and taxpayers can carry over unused capital losses to subsequent years.

WHAT IS CAPITAL GAINS TAX?

A tax on profits earned from asset sales. This can include real estate, a business, stocks and/or many other types of investments. If you sell it for more than you paid for it, You'll likely pay this tax.

Internal Revenue Service (IRS) rules on taxing capital gains include:

  • Length of time you’ve owned the asset (unrealized gains)
  • Cost of ownership + fees
  • Amount of realized gains
  • Income tax bracket
  • Marital status

The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than $80,000.

A capital gain rate of 15% applies if your taxable income is $80,000 or more but less than $441,450 for single; $496,600 for married filing jointly or qualifying widow(er); $469,050 for head of household, or $248,300 for married filing separately.

However, a net capital gain tax rate of 20% applies to the extent that your taxable income exceeds the thresholds set for the 15% capital gain rate.

Real-estate related exceptions where capital gains may be taxed at rates greater than 20%:

  • The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.
EXCLUDING PROFIT

You may qualify to exclude up to $250k of the profit as an individual and up to $500k if you file a joint return. To qualify, you must:

  • Meet both ownership and use criteria
  • Have owned and made use of the residence as your main home for at least two years of the five years prior to the sale date
  • Have not excluded an additional residence during the two-year period prior to the sale of your home
  • Publication 523 outlines eligibility requirements.

CAPITAL GAINS RATES

Short-Term or Long-Term? To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For exceptions to this rule, such as property acquired by gift, property acquired from a decedent, or patent property, refer to Publication 544, Sales and Other Dispositions of Assets; or for commodity futures, see Publication 550, Investment Income and Expenses. To determine how long you held the asset, you generally count from the day after the day you acquired the asset up to and including the day you disposed of the asset.

If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. The term "net capital gain" means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term "net long-term capital gain" means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years.

SHORT TERM CAPITAL GAIN

Investments held for one year or less are subject to short-term capital gain taxes. Your tax bracket and short term capital gains increase with income. Short-term capital gain is taxed at a higher rate than long-term gain. The percentage of tax changes according to your filing status and income.

  • Tax Rates for Short-Term Capital Gains 2020
    Filing Status10%12%22%24%32%35%37%
    SingleUp to $9,875$9,876 to $40,125$40,126 to $85,525$85,526 to $163,300$163,301 to $207,350$207,351 to $518,400Over $518,400
    Head of householdUp to $14,100$14,101 to $53,700$53,701 to $85,500$85,501 to $163,300$163,301 to $207,350$207,351 to $518,400Over $518,400
    Married filing jointlyUp to $19,750$19,751 to $80,250$80,251 to $171,050$171,051 to $326,600$326,601 to $414,700$414,701 to $622,050Over $622,050
    Married filing separatelyUp to $9,875$9,876 to $40,125$40,126 to $85,525$85,526 to $163,300$163,301 to $207,350$207,351 to $311,025Over $311,025

    Source: Internal Revenue Service.

LONG TERM CAPITAL GAIN

Long-term capital gain applies to investments held for one year + one day and longer. The rate is based on income and tax bracket. Under current law, most filers are subject to a rate of 15% for long-term capital gain. High earners are subject to a 20% rate and low earners are exempt from long-term capital gain.
New legislation has been proposed to change these rates and brackets. Before planning for your capital gain tax rate, check with the IRS for the most current rules.

RULES
Filing Status0% rate15% rate20% rate
SingleUp to $40,000$40,000 to to $441,450Over $441,450
Head of householdUp to $53,600$53,600 to $469,050Over $469,050
Married filing jointlyUp to $80,000$80,000 to $496,600Over $496,600
Married filing separatelyUp to $40,000$40,000 to $248,300Over $248,300

Source: Internal Revenue Service.

President Biden’s proposal to raise long-term capital gains taxes for individuals earning $1 million or more to 39.6% is pending in 2021. Added to the existing 3.8% investment surtax on higher-income investors, the tax could rise to 43.4%, before state taxes. For updates on tax legislation and your tax rates, check with your tax professional or the IRS.

DISCLAIMER

We are not tax professionals. There are many variables involved in computing capital gains and a good deal of information will be needed by your tax preparer in order to do so. We can't advise you on the percentage of capital gains you will pay on the sale of your property. Please consult a tax expert with experience in real estate.

UPDATES
TOOLS, TIPS AND FORMS

For many, capital gain from selling a home aren’t taxed. The exception is one of the biggest in the tax code. For a single person, up to $250,000 in profit is exempt from tax obligation. If married and filing jointly, that threshold goes up to $500,000 exempt from taxation. There are a few requirements related to getting the tax break:

  • You must provide documentation that the home was your primary residence. The IRS will want to determine the amount of time you spend at the residence, your employment location and its proximity to the residence, your driver’s license state/location, addresses used for your tax returns, voter registration and other official communications.
  • You must have owned and used your home as a primary residence a minimum of two of the five years prior to the sale date.  Ownership and primary residence use needn’t be consecutive or concurrent and it is not required that you are living in the home at the time of the sale. If you occupied the residence fewer than two of the five years prior to the sale you may still qualify for a reduction but the savings will be less. There are also provisions for inherited property, military personnel on active duty and property being sold as the result of a divorce.
  • The exemption is only valid once every two years. You can’t take the exemption on multiple homes within the same two year period.

There are some exceptions where capital gain may be taxed at rates greater than 15%:

  • The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
  • Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
  • The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.
FROM THE IRS

From the IRS: Report most sales and other capital transactions and calculate capital gain or loss on Form 8949(PDF), Sales and Other Dispositions of Capital Assets, then summarize capital gains and deductible capital losses on Form 1040, Schedule D (PDF), Capital Gains and Losses.

If you have a net capital gain, a lower tax rate may apply to the gain than the tax rate that applies to your ordinary income. The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss for the year. The term “net long-term capital gain” means long-term capital gains reduced by long-term capital losses including any unused long-term capital loss carried over from previous years. The tax rate on most net capital gain is no higher than 15% for most taxpayers. Some or all net capital gain may be taxed at 0% if you’re in the 10% or 15% ordinary income tax brackets. However, a 20% tax rate on net capital gain applies to the extent that a taxpayer’s taxable income exceeds the thresholds set for the 39.6% ordinary tax rate ($415,050 for single; $466,950 for married filing jointly or qualifying widow(er); $441,000 for head of household, and $233,475 for married filing separately).

If you have a taxable capital gain, you may be required to make estimated tax payments. For additional information, refer to Publication 505, Tax Withholding and Estimated Tax, Estimated Taxes, and Do You Have to Pay Estimated Tax? If your capital losses exceed your capital gains, the amount of the excess loss that you can claim on line 13 of Form 1040 to lower your income is the lesser of $3,000, ($1,500 if married filing separately) or your total net loss shown on line 16 of the Form 1040, Schedule D (PDF). If your net capital loss is more than this limit, you can carry the loss forward to later years. You may use the Capital Loss Carryover Worksheet found in Publication 550, Investment Income and Expenses, or in the Form 1040, Schedule D Instructions, to figure the amount you can carry forward. Taxpayers with significant investment income may be subject to the Net Investment Income Tax (NIIT).

For additional information on the NIIT, see Topic 559. Additional information on capital gains and losses is available in Publication 550 and Publication 544, Sales and Other Dispositions of Assets. If you sell your main home, refer to Topics 701 and 703, and Publication 523, Selling Your Home.

FROM A DISTRICT OF COLUMBIA CPA

Because capital gain taxes can involve complex calculations and knowledge of the rules of law pertaining to real estate taxation, you should seek advice from a tax professional expert in real estate taxation. This webpage by Kronzek, Fisher & Lopez, PLLC is a helpful resource for preliminary questions and planning. It lays out many of the scenarios common to the sale of real estate.

WEBPAGE

Expertise is one call away.

The Isaacs Team LLC

Realtors

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