We’ve all heard of the capital gains tax but what is it exactly? Well, first of all the capital gains tax is actually the capital gains taxes. There is not just one because there is a federal tax as well as a possible state tax depending upon where you live. Yep, some of us will be paying twice.
Capital gains taxes have been around since the very first tax code and there’s no indication that this is going to change any time soon. Basically any time that a property is sold for more than what was originally paid for it the difference is subject to taxation.
It’s important to know the tax laws in your state because you don’t want to face a huge tax bill simply because you have sold your home. Historically California has had the highest capital gains tax of any state and Texas and Wyoming had none but these things can change from year to year and a wise seller will want to get the latest information available.
I have often been asked if there is any way to avoid these taxes. I am not a tax expert but I am aware of only one way to avoid paying them. If you sell your home and invest the money into another home of equal or greater value than you will not be subject to paying any capital gains tax. What does this mean to sellers? It means a lot.
If you are planning to sell your home and use the money to rent a cute little bungalow in Florida and take that world cruise you’ve always dreamed of, you are definitely going to pay capital gains. Why? Because you didn’t use the money from the sale of your home to buy another property. If however, you are planning to sell your current home and reinvest the money in another property that costs as much or more than the home you’re selling you will not be subject to any type of capital gains tax.
It’s easy to see why knowing about capital gains taxes is so important. It’s also easy to see why many people that sell a home to move to another state usually buy another home instead of renting. If you are planning to sell your home and keep the proceeds for your retirement or some other purpose be sure to check with a qualified tax expert before making your final decision. The last thing you want (or need) is to cancel your dream trip to Europe because of an unexpected tax liability.