Real Estate Capital Gains

Homeowners usually incur a capital gains tax on property sold at a profit. A capital gain is material wealth in the form of money made from the sale of real estate, trusts, corporations, partnerships, or any qualifying tangible possession. The Internal Revenue Service defines a capital asset as property owned for personal purposes or as an investment. Houses, furnishings, automobiles, and stocks and bonds are considered assets. Property owned in conjunction with a business, including real estate used for trade or business purposes, is not considered a capital asset. When an individual sells a possession, the difference between the amount the asset is sold for and the amount an owner initially paid for it is called a capital gain. In the marketplace, assets are bought and sold 24/7; but the U.S. Department of Revenue demands taxpayer accountability and enforces taxation on specific net earnings.

Although the housing market is in a severe slump in the United States, some sellers are making money through real estate sales or by accumulating heir property. Other sellers are letting their properties go at a loss due to the severity of the housing market downturn. Escalating interest rates have left some homeowners holding mortgages that are worth much less than current market prices. Some are fortunate enough to unload these properties, but still fall short of outstanding mortgage balances and cannot recoup money initially invested, or what the IRS terms as the initial cost, or basis, of the property. Whether owners realize net profits or losses, they are required to itemize transactions on the Internal Revenue's Schedule D of Form 1040 Or Form1040NR, "Capital Gains and Losses."

Owners who realize a profit from housing sales must itemize the extra income on Form 1040 and are subject to taxation. The real estate capital gains tax on property is usually assessed at a maximum 25% rate. In real estate sales, 25% can amount to thousands of dollars on the taxable portion of a net capital gain. The IRS may require taxpayers to make estimated payments to settle the capital gains tax on property sold. But paying taxes is older than the Bible. Even Joseph, Jesus natural father, paid taxes in compliance with Caesar's decree. "And it came to pass in those days, that there went out a decree from Caesar Augustus, that all the world should be taxed. (And this taxing was first made when Cyrenius was governor of Syria.) And all went to be taxed, every one into his own city. And Joseph also went up from Galilee, out of the city of Nazareth, into Judaea, unto the city of David, which is called Bethlehem; (because he was of the house and lineage of David:) To be taxed with Mary his espoused wife, being great with child" (Luke 2:1-5). A necessary requirement for Old Testament and modern day citizens, taxes provide much needed revenue to keep city, state and federal governments viable.

The IRS allows homeowners who suffer a loss to itemize and claim a maximum deduction of $3,000. A $1,500 deduction is allowed for married individuals who sell jointly owned real estate, yet file separately. If losses exceed the maximum $3,000 deduction, the Internal Revenue Service may allow filers to carry the loss over future years. Taxpayers file Schedule D of Form 1040 to qualify for certain tax deductions, in the case of a loss, or to pay the capital gains tax on property. Real estate capital gains affect a taxpayer's net taxable income and help determine whether filers qualify for an income tax refund or are assessed a liability. Schedule Ds are also filed with a payment to the federal government if the selling price netted a profit above the taxpayer's basis, or the amount the consumer initially paid for the property. Filers should use a Schedule D when assets have been sold or exchanged and have not been reported on any other form or schedule; to report distributions not included on Form 1040 or Form 1040NR; or to annotate gains from involuntary conversions of personal assets. Taxpayers may also report personal bad debts, such as defaulted promissory notes or loans.

To complete Schedule D and have the Internal Revenue Service assess tax on property sold, filers must include a legal listing of the real estate, date acquired, date sold, and sales price; along with the original purchase price, or basis, and the computed net gain or loss. Owners of multiple real estate holdings must furnish information on each property. Assets held one year or less are listed as short-term gains or losses, while those held for more than a year are listed on a separate section of the Schedule D as long-term.

Computing real estate capital gains is relatively simple. The IRS provides detailed instructions and information in Publications 550 and 544, which may be downloaded from the IRS website. Publication 550, "Investment Income and Expenses," outlines regulations for reporting profits from the sale of investments such as stocks and bonds. Publication 544, "Sales and Other Dispositions of Assets," deals largely with IRS requirements for reporting profit made from the sale or acquisition of real property. Sellers who realize real estate capital gains from the sale of a main residence should reference Publication 523, "Selling Your Home." If IRS publications still leave sellers confused, the best recourse is to seek the advice of a certified public accountant, realtor, local lending institution, or banker. Local Internal Revenue offices may also be able to provide assistance in computing net gains or losses and helping homeowners determine and file estimated tax payments.

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