A Guide to Calculating Capital Gains when Selling your Bay Area Home
If you have worries about high commissions when selling your Bay Area home, there is a chance that there are going to be larger expenses that you might not have considered–capital gains. There is a chance that you will face up to 40% capital gains tax when selling your home in the state of California. If you are considering selling your home in California, it is important to understand how capital gains work when you are selling your residence.
In this article, we will discuss how you can best calculate capital gains when selling your Bay Area home.
Common Misconceptions about Capital Gains
If you have gradually accumulated equity in your home over a few years, understanding capital gains is going to be a key part of anticipating the tax liability that you may face when selling. There are times when it can be confusing about the amount of capital gains owed upon selling a home. There are many misconceptions about how capital gains work, particularly when it comes to the sale of a primary residence. The confusion can be easily traced back to changes in the tax code, which once allowed homeowners to defer capital gains if they purchased a property of higher value after the sale.
How You Can Calculate Your Capital Gain
The first step in calculating your capital gains is to determine your basis. The home’s cost basis is typically what you paid for it. The basis can be easily adjusted if your spouse passed away or if you acquired the property after a divorce settlement. In addition to the basis, you will add costs incurred to acquire the home, like closing costs. Next, you can then factor in the costs of improvements made to the home, such as remodeling, additions, heating or cooling systems, landscaping improvements, and new windows. Anything that enhances the value of your home can be considered an improvement. Then, consider the costs incurred when selling your home, like closing costs and commissions.
To calculate your capital gain, you will deduct the basis, costs incurred during the purchase, improvement costs, selling costs, and the exemption. It is important to keep in mind that the capital gain is distinct from your proceeds, which will depend on outstanding loans on the property and the selling costs.
How to Calculate Your Tax Liability
The complex part is calculating your capital gains tax liability, which will involve understanding your filing status and the total capital gains for the calendar year. Federal and California capital gains rates are based on a tiered schedule, where capital gains that are higher result in higher tax rates. For example, if you earn over $250k as an individual, including your real estate sale gains, you are going to be subject to a 3.5% tax.
Important Points
Regarding withholding taxes when you sell, the federal government does not typically require withholding if the home is your primary residence and you are not a foreign national–if you have a green card or are a citizen. However, the state of California does not require withholding if it is not your primary residence. Like the housing market, the tax system is always evolving, with significant changes occurring when new administrations take office.
Bottom Line
There has been an increased appreciation of local property values. This is great for wealth creation, the consequences of tax are often overlooked and misunderstood. Use the information to help shed light on the costs associated with selling a property, helping you to make the best-informed decisions when selling your home. Enjoy living in the Bay Area? Trust the real estate professionals at Homeowner Experience Real Estate to guide you in finding and settling down in the home of your dreams in the many beautiful, thriving neighborhoods that make up Silicon Valley, today.