Capital Gains Tax on Real Estate and Home Sales

Therefore, if one spouse earns income in excess of $1,000,000 and the other does not, it would make sense to consider shifting investment assets into the name of the other spouse. The new capital gains tax law did not change the rules prohibiting the deduction of certain capital losses. Capital losses that are disallowed as a deduction under Code § 165 , § 262 or § 267 are not deductible for Massachusetts state tax purposes. For example, losses on the sale or exchange of collectibles that are held for personal use are not deductible. Although the law is fairly lenient on residency times for marriages, it is not so lenient on previous exclusion uses. Previous marriages are a vital consideration when it comes to real estate capital gains taxes.

This deduction can come from living in the home two out of the last five years. In 2009, a law was put into effect that closed a tax loophole in the capital gains tax law. The code is known as the 2008 Housing and Economic Recovery Act. The law was put into effect as a means of preventing wealthy homeowners from avoiding paying taxes.

Taxachusetts Redux? The New Massachusetts Millionaires Tax

The final exemption to paying capital gains taxes is using a 1031 exchange. This is basically a code that allows the seller of the home to reinvest the money from the sale of the home into buying another home. In order for this to create an exemption, you must reinvest the money within 45 days of the sale of the home. This code can also be used for some corporations and LLCs as well. There are instances when the capital gains tax rate is 5.1%, but those rates specifically apply to different schedules.

Don’t let this catch you by surprise and create a financial burden. Consult with an accountant or tax advisor before selling an inherited property. Also consider the above methods for reducing or deferring taxes. Knowing your options and what to expect will allow you to save money and make better decisions. Asset selection and tax-advantaged financial products may also help mitigate the additional tax.

Basic planning for individuals—spreading and accelerating

Investment income realized from interest, dividends and long-term capital gains is taxed at the more favorable rate of 5.0% (2020, 5.05% in 2019). Investment income realized from short-term capital gains is taxed at the less favorable rate of 12.0%.Add your investment income from interest, dividends and long-term capital gains. This is your Net Massachusetts Investment Income.Add your investment income from short-term capital gains. This is your Net Massachusetts Short-Term Capital Gains Income. If a couple has substantial unearned income, that income could be spread between the spouses to ensure that each makes full use of the first $1,000,000 of income that is free of the additional tax.

• And many taxpayers may not even realize the extra tax will apply to them.
• You may also combine your cost basis and improvement costs to reach the $250,000.
• The law’s modification says that the gain may not be excluded for periods of “non-qualified use,” mostly when the home was not used as the taxpayer’s primary residence.
• Some things can be done in 2022 to accelerate income into the current year, while others include opportunities for 2023 and beyond.
• Our team is here to help you sell your house fast on your terms and avoid a long, drawn-out process.
• 10 percent for single filers up to $10,275, up to 20,55o for married filing jointly, and up to $14,650 for the head of household.

Currently, the Massachusetts tax rate on wages, long-term capital gains, dividends, interest and other income, is 5% for all taxpayer income levels. If voters approve the ballot measure, the Massachusetts tax rate on income in excess of $1 million will increase by 4%. Substantively, the Millionaires’ Tax has a multitude of consequences. The latter is among the highest personal income tax rates on short-term capital gains in the nation. Because Massachusetts taxes short term capital gains at 12%, the effective new tax rate on this income will be 16%.

Requirements For Taking Real Estate Capital Gains Tax Deduction

For example, does massachusetts have state income tax in assets that generate income that is exempt from state tax, such as many Massachusetts municipal bonds, may become more attractive. Private placement life insurance and private placement variable annuities , may also become more attractive simply because the income tax deferral, and in some cases tax elimination, that they provide will become more valuable. Although higher household income is often something families strive for, with the passage of the Massachusetts Millionaires Tax on November 8, 2022, having taxable income in excess of $1 million has become less attractive for 2023 and beyond. There is a new law that just went into effect as of January 1st 2009 that closes a tax loop hole in the Capital Gains law. The recently signed 2008 Housing and Economic Recovery act has placed new restrictions on wealthy home owners who own two or more homes and plan to hop from one home to another to avoid paying capital gains.

In contrast, Massachusetts taxes income of an individual who is neither domiciled in Massachusetts nor a resident of Massachusetts only to the extent the income derives from a Massachusetts source. An individual could therefore escape the taxing authority of Massachusetts over non-Massachusetts source income by changing his or her domicile and ending his or her residency in the Commonwealth. Avoid Massachusetts income tax altogether on non-Massachusetts-source income by moving out of Massachusetts.

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This is a general communication should not be used as the basis for making any type of tax, financial, legal, or investment decision. The simple examples above only illustrate the state tax impact, but federal tax implications will also apply. Further, both examples ignore other sources of income, such as wages, pre-tax retirement account distributions, dividends, etc., that could increase the tax due from the surtax. So, the millionaire’s tax is already here for residents of Massachusetts and may soon be here for residents of California, Connecticut, Hawaii, Illinois, Maryland, New York, Oregon, and Washington and lost likely more.

Anderson Anselmo