Are you planning to sell your Houston property and wondering what capital gains tax is and why you are liable to pay it?
Houston, being located in Texas, is a great place to live and invest. And one of the many benefits of living in Houston is that there is no state capital gains tax in Houston.
But even though you may not have to worry it, it is still important that you know the federal law that encompasses it. These taxes can be a bit of a headache, but there are ways to reduce or even avoid them altogether.
What Are Capital Gains?
Capital gains refer to the net profit the owner earned from selling a capital asset like real estate, stock, and bond. To make it simpler, it is the selling price’s remainder from the original price.
It is also divided into two categories: short-term and long-term. Either or, both are subject to capital gains taxes.
Capital Gains Tax
Capital gains tax is a tax imposed on the net profit earned from a capital asset’s sale and is calculated as a percentage of the capital gain. The rate will then be based on the individual’s income tax bracket, as well as whether the gain is short-term or long-term.
There are several aspects that affect one’s capital gains tax rate. The most common are the period in which the asset was owned before selling it (also known as short-term and long-term capital gains), filing status, and income tax bracket.
Here’s how they can influence the tax rate.
Short-term and Long-term Capital Gains
Long-term capital gain, according to the IRS, is the profit earned from a sold asset that was held for more than a year while short-term capital gain is the profit earned from a sold asset that was held for a year or less.
How Does It Affect the Tax Rate?
Short-term and long-term capital gains have varying tax rates.
For the short term, the gains are taxed based on the taxpayer’s filing status and are taxed like ordinary income. The rate will also be based on the adjusted gross income or AGI.
Long-term capital gains, on the other hand, are typically taxed at a lower rate than short-term capital gains. The exact tax percentage depends on the taxpayer’s marital status—which we will discuss in the next section—and income as well.
But that is in general.
Tax rates for capital gains differ from state to state. Some states apply varying or special rules to some types of capital assets too. Keep in mind that the tax rate for capital gains is also subject to change and may change over time.
As such, it is best to consult with a financial or tax professional first to understand the current tax rate for capital gains and if you can get an exemption. Or you can contact real estate investors such as Get Your Fair Offer and let them process everything for you.
Filing Status and Income Tax Bracket
The federal tax rate for long-term capital gains is generally lower than the rate for short-term capital gains. For tax years 2022 and 2023, the federal tax rate on long-term capital gains is based on the taxpayer’s income tax bracket.
How Does It Affect the Tax Rate?
The rate differs based on the filer’s marital status and income tax bracket. Here’s a sample of the tax rate for the years 2022 and 2023:
- Single. If taxed at 0%, the tax rate can go high as $40, 400; if taxed at 15%, the tax rate ranges between $40, 401 and $445,850; if taxed at 20%, the rate is $445,851 and above.
- Married filing jointly. If taxed at 0%, the tax rate can go high as $80, 800; if taxed at 15%, the rate ranges between $80, 801 and $501,600; if taxed at 20%, the tax rate is $501,601 and above.
- Married filing separately. If taxed at 0%, the tax rate can go as high as $40, 400; if taxed at 15%, the rate ranges between $40, 401 and $250,800; if taxed at 20%, the tax rate is $250,801 and above.
- Head of the household. If taxed at 0%, the tax rate can go high as $54, 400; if taxed at 15%, the rate ranges between $54, 401 and $473,750; if taxed at 20%, the tax rate is $473,751 and above.
Capital Gains Tax in Houston
Texas does not have a state capital gains tax. And Houston, being part of the state, does not impose a tax on sold capital assets. Still, residents in Houston and other cities in Texas are subject to federal capital gains taxes.
That said, the federal capital gains tax rate for long-term capital gains in Houston is generally lower than the rate for short-term capital gains. The tax rate for long-term capital gains in 2020 and 2021, for instance, is 0%, 15% or 20% depending on the taxpayer’s income while the tax rate for short-term capital gains is the same as the taxpayer’s ordinary income tax rate.
Is it Possible to Avoid It?
We know that paying tax for something that you own is kind of frustrating at times. Fortunately, there are ways to reduce—and even avoid—the rate in Houston, Texas.
- Take advantage of the state’s long-term capital gains policy. As mentioned earlier, the tax rate in Houston for long-term capital gains is relatively lower compared to short-term capital gains.
So, why not take advantage of it by selling it more than one year after you purchase the property?
- Donate it to a charity. Do you know that donating properties can reduce and prevent you from paying capital gains? Capital assets such as stocks and real estate apply to the said policy. So long as you donate it directly to the charity.
- Sell it at a lower price. If you sell an asset for less than you paid for it, you have a capital loss, which can offset capital gains and reduce your overall tax liability.
Selling a house is indeed a tough and demanding process. You will have to prepare everything—from important documents to paying taxes. As such, if you want a fast, hassle-free, and reliable way to profit off of your property, then contact Get Your Fair Offer now and consider your house sold!
Get Your Fair Offer is one of Houston’s trustworthy real estate investors. We guarantee to give you the best and fair price offer only, which your property deserves.
Reach out to us now and get a REAL offer! Call us at 281-709-2999.