If you reinvest in a new home, you'll get a tax break. On the other hand, there are techniques to lower the amount of tax that must be paid.
The residential real estate industry is booming. There is a scarcity of supply in comparison to the high demand, which is driving up house prices. Furthermore, the national situation encourages people to sell their homes in the hopes of making a profit. However, if the property is sold for a higher price than when it was purchased, a capital gains tax is due for payment. This is true if the case does not fall under one of the legal exemptions. Find out what they are in this article.
But, after all, what is an asset? "The gains realized represent capital gains that, not being considered business and professional income, capital or property, originate from the onerous disposition of real rights in real property or the onerous disposition of shares and other securities," according to Article 10 of the IRS Code.
The difference between the sale value of a property (the appraisal established by the financing) and the acquisition value is the added value in the real estate world (value referred to in the deed of the house). Also deduct the fees associated with the acquisition and sale of the property, as well as the fees associated with the valuation of the property (works, for example). It's worth noting that the monetary coefficient is still used to update the acquisition value. If the outcome of this procedure is positive, the real estate transaction's capital gains are earned.
Those who purchased a home for 100,000€ and want to sell it for 150,000€ might expect to receive an additional 50,000€. And, because this amount is considered income, it is taxable and must be reported to the IRS (Annexes G and/or G1). Annex G1 (Table 5) must be completed if the date of acquisition of the residence now sold is before January 1, 1989. Annex G (Table 4) must be completed if it is later.
Capital gains exemption: which cases are covered?
The modification in the law for 2021, which was introduced in the State Budget for 2021, lowered the instances in which property capital gains are excluded from paying tax. Until 2020, there was an extraordinary system in effect that exempted those who utilized capital gains money to pay the credit for their own permanent residence, as long as the loan was contracted by 2014. However, as of 2021, this scheme is no longer in use. Only now is it planned to avoid the payment of capital gains when selling a home if the proceeds are re-invested in new housing. And that's not all. The following situations are free from capital gains tax, according to the IRS Code:
• If the taxpayer's permanent residence is sold and the capital gains are entirely reinvested in the acquisition, building, or restoration of another permanent residence. The family has 36 months (three years) to complete the reinvestment in this scenario. If you bought the house before selling the old one, you have two years to notify the tax authorities that the capital gains would be used to pay for the new one;
• Retired taxpayers or those over 65 who invest capital gains in an insurance contract, an open pension fund that guarantees a regular monthly income, or the public capitalization system (retirement certificates) within six months of the property's sale;
• Properties purchased prior to 1989, when the IRS legislation went into effect, are also exempt from capital gains taxes.
How can I minimize the payment of capital gains?
If you do not meet the requirements for capital gains exemption, you might try to lower the amount of tax you owe. As indicated in this article by the General Deposit Box (CGD), there are numerous expenses that count towards the computation of the tax and can even reduce it. To do so, you must submit up to 12 years of invoices in your IRS statement, referencing:
• Improvement and maintenance works of the property;
• Fixed appliances, such as range hoods and air conditioning;
• Expenses associated with acquisition and disposal, such as IMT (or SISA), notary and land registration fees, energy certification costs, and the intermediation commission;
• Evidence of remuneration for the onerous waiver of contractual positions or other rights in contracts involving such assets.
Pay capital gains for the sale of inherited properties
The payment of capital gains in the case of inheritances is also planned. When a property is entirely inherited on a single date, the Tax Authorities are required to assign it a value that will be used to compute capital gains if the heirs decide to sell it. It's also vital to remember that in the instance of an inherited home, the date of acquisition will be the date of the owner's death.
If an ascendant died in 1986 and the house was inherited in 1986, but the property was shared in 1995, the date of acquisition to consider is 1986. Because the capital gains were earned before 1989, they are not subject to IRS taxation, but they must still be declared in Annex G1 of Model 3, as CGD exemplifies.
If parts of a house are inherited on separate dates, the scenario will be different. When the property was owned by two ascendants, this can happen. It also indicates that each of the owners' dates of death corresponds to a separate acquisition value and a share of the selling value, which must be broken down in the IRS declaration, in Table 4 of Annex G to Model 3, and there may be portions that should be put in Table 5 of Annex G1.