How Will the 2013 Tax Brackets Affect Your Home Sale?

By | May 16, 2013

The 2013 tax brackets are for tax year 2013, for use in 2014 when filing federal income tax returns.  Any income you receive will be taxed using the marginal tax bracket structure put into place about a century ago.  Depending on your filing status and your income, you will pay anywhere from 10% to 39.6%.  But since we in the US use a marginal tax rate, you won’t be paying top rate for every dollar of income you make.  It’s a graduated system but there are some exceptions to the marginal tax rate system.  They’re called capital gains.  Capital gains are taxed at a fixed rate no matter what your marginal tax rate is.

What Counts as Capital Gains?

Income is income, no matter where it comes from, right?  Well no, not according to the IRS.  There’s salary, which is regular income taxed under the marginal tax structure.  You worked a job and you received wages for the work.  Regular income. But selling something at a higher value than what you paid, that’s capital gains.  All you did was buy, hold, then sell.

So obviously stocks and bonds you sell would create capital gains, assuming you made money.  If you didn’t, it’s a capital loss.  The word capital in this situation simply means an asset.  So even a house is an asset, so it’s also capital.  Therefore, if you sell your house and make a profit then you’ve got some capital gains to deal with.  That jet ski you bought last summer?  Also counts as capital.  If you sell it for a profit that’s capital gains and you have to report it. More on that at the IRS website here.  And the new 2013 tax brackets have changed the capital gains tax.  Let’s find out how…

How are Capital Gains Taxed?

If you only own the asset for one year or less, the income just gets lumped in with your regular income so it’s taxed according to the tax bracket you fall into.  But for something held longer and then sold, it’s called a long-term capital gain.  This is taxed at a different rate, separately from your tax brackets.

Your capital gains tax rate depends on which of the 2013 tax brackets you fall into.  If your taxable ordinary income places you in one of the two bottom 2013 tax brackets, then your capital gains tax is 0%.  The two bottom tax brackets for 2013 are 10% and 15%.

If your taxable income places you into the other brackets then you will pay 15% capital gains tax.  The 2013 tax brackets after the bottom two levels start at 25%.  So, if you are in the 25% rate or higher, then your capital gains tax rate is 15%.

A Special Capital Gains Tax Rate for the Wealthy

If you are in the any of the 2013 tax brackets except the lowest 2 levels and you own investment property, you’ll be taxed at 20%, not 15% when you sell.

Let’s clarify home sale here.  We’re talking about a special 2013 tax rate for investment home sales, not primary home sales.  For your primary home sale, you can exclude the capital gains if you lived in the home for at least two years out of five of the years leading up to the tax year you’re filing.  Well, up to a certain point anyway.  If your capital gains from selling your primary home are less than a quarter of a million dollars ($250,000) then you pay zero.  Over that amount and you’ll be paying 15% on the overage.

Related posts: