When selling a home there are many things that the sellers have to accommodate for, such as possible rent-backs, filing new paperwork, and paying applicable taxes. In the United States, the seller of a home has to pay a capital gains tax of 5%, which can even be raised to 12% depending on state policies. This tax payment is an obstacle that many Massachusetts home-sellers have to deal with, so one question we get asked is “can we avoid paying those taxes?”
What is capital gains tax?
Capital gains taxes are charged based on capital assets a person has, such as real estate, stocks, bonds, and even jewelry. As of current federal policies, these taxes can only come from the sale of these assets. The price of these taxes are equated based on the initial cost of the asset compared to how much that asset is sold for. There is not always a capital gain on these assets, but that only applies when the cost of the asset is more than what it is sold for.
Qualifying capital assets will not be taxed until sold, no matter how long it has been in the owner’s possession. So, for our home-sellers, it does not matter how long you have had your home, you will not be charged for capital gains taxes until your home is sold.
What are the types of capital gains?
There are also two different types of capital gains taxes: short-term capital gains and long-term capital gains:
- Short-term capital gains are for capital assets that have been in the owner’s possession for a year or less, which means that they are taxed as normal income.
- Long-term capital gains are for capital assets that have been in the owner’s possession for more than a year.
What is the federal capital gains tax for 2023?
The specific tax rate that applies to you will ultimately depend on your filing status along with your taxable income.
Short Term Capital Gains Tax Rates
| Filing Status | Taxable Income | Short-Term Capital Gains Rate |
|---|---|---|
| Single | $0-$11,000 | 10% |
| Single | $11,001-$44,725 | 12% |
| Single | $44,726-$95,375 | 22% |
| Single | $95,376-$182,100 | 24% |
| Single | $182,101-$231,250 | 32% |
| Single | $231,251-$578,125 | 35% |
| Single | Over $578,125 | 37% |
| Married Filing Jointly | $0-$22,050 | 10% |
| Married Filing Jointly | $22,051-$89,050 | 12% |
| Married Filing Jointly | $89,051-$178,150 | 22% |
| Married Filing Jointly | $178,151-$336,250 | 24% |
| Married Filing Jointly | $336,251-$416,750 | 32% |
| Married Filing Jointly | $416,751-$665,050 | 35% |
| Married Filing Jointly | Over $665,050 | 37% |
| Married Filing Separately | $0-$11,025 | 10% |
| Married Filing Separately | $11,026-$44,525 | 12% |
| Married Filing Separately | $44,526-$89,075 | 22% |
| Married Filing Separately | $89,076-$168,125 | 24% |
| Married Filing Separately | $168,126-$208,375 | 32% |
| Married Filing Separately | $208,376-$332,525 | 35% |
| Married Filing Separately | Over $332,525 | 37% |
| Head of Household | $0-$14,400 | 10% |
| Head of Household | $14,401-$58,700 | 12% |
| Head of Household | $58,701-$117,400 | 22% |
| Head of Household | $117,401-$235,900 | 24% |
| Head of Household | $235,901-$293,350 | 32% |
| Head of Household | $293,351-$570,700 | 35% |
| Head of Household | Over $570,700 | 37% |
Long Term Capital Gains Tax Rates
| Filing Status | Taxable Income | Long-Term Capital Gains Rate |
|---|---|---|
| Single | $0-$41,675 | 0% |
| Single | $41,676-$459,750 | 15% |
| Single | Over $459,750 | 20% |
| Married Filing Jointly | $0-$83,350 | 0% |
| Married Filing Jointly | $83,351-$517,200 | 15% |
| Married Filing Jointly | Over $517,200 | 20% |
| Married Filing Separately | $0-$41,675 | 0% |
| Married Filing Separately | $41,676-$258,600 | 15% |
| Married Filing Separately | Over $258,600 | 20% |
| Head of Household | $0-$55,800 | 0% |
| Head of Household | $55,801-$488,500 | 15% |
| Head of Household | Over $488,500 | 20% |
How do these tax policies apply to Massachusetts specifically?
In the state of Massachusetts, the capital gains tax rate is in Schedule B at 12%. This rate specifically applies to: short-term capital gains, which include collectibles, long-term capital gains on collectibles and pre-1996 installment sales, and gains on the sale of a property that were used for a trade or a business that was held for one year or less.
There are instances when the capital gains tax rate is 5%, but those rates specifically apply to different schedules. The qualifying capital assets for this rate are small business stocks, interest on savings deposits to banks, and interest loans from pawnbrokers.
These taxes are to be paid to the IRS during the applicable tax season, once the seller has filed federal income taxes and income tax returns after the sale of the capital asset.
| Filing Status | Massachusetts Short-Term Capital Gains Rate | Massachusetts Long-Term Capital Gains Rate |
|---|---|---|
| Single | 12.00% | 5.00% |
| Married Filing Jointly | 12.00% | 5.00% |
| Married Filing Separately | 12.00% | 5.00% |
| Head of Household | 12.00% | 5.00% |
Seeing that the Massachusetts capital gains tax rate is the highest in the country, we acknowledge that these tax rates are rough, to say the least. We understand that selling your home may sound even more nerve-wracking because of capital gains taxes. So, we are here to provide you with information on exemptions to paying capital gains taxes, and other applicable information.
Which capital gains are taxed at 12%?
Short-term capital gains are taxed at 12%. A short term capital gain is an asset that you’ve held for one year or less.
What is the capital gains on real estate in Massachusetts?
In Massachusetts, capital gains from the sale of real estate are taxed at the same rates as other capital gains – 12% for short-term capital gains and 5% for long-term gains.
Are there any exemptions for capital gains taxes on real estate?
If you are in a position where you are feeling nervous about paying capital gain taxes after selling your home you may be exempt from this policy.
The first exemption to paying the capital gains taxes is if you are a single individual and you meet the outlined criteria:
- Your home sold for $250,000 or less
- You haven’t been exempt in the last two years (a single individual can only be exempt once in two years)
Another exemption can be applied to married couples as well. The criteria for this exemption is as follows:
- The home sold is your primary residence (you have lived in the home for two out of the last five years)
- Your home sold for $500,000 or less
- You haven’t been exempt in the last two years
If you are someone who is still legally married but separated or you and your spouse file taxes separately then you will have to follow the single individual exemption rules.
Another exemption to paying capital gains taxes is if you turned your home into a rental property and have not been living in it. If this is the case for you, it is important to understand that you cannot sell both homes (your primary residence and the rental property) without paying capital gains taxes. You must wait two years or more to be able to be exempt again, should you meet the previously outlined criteria.
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.
It is also important to note that while you may not be able to get any exemptions from capital gains taxes, you may be able to get some deductions, which can help out with costs. This deduction can come from living in the home two out of the last five years.
Closing thoughts
When selling your home it is vital to understand all the legalities and costs that come with this process. Here at Pavel Buys Houses we want to ensure that you are fully knowledgeable about the selling process and that you are ready to take this next step. Please keep in mind that while you might be exempt from paying capital gains taxes, you are still responsible for paying other fees that come with selling a home. However, we do understand that not having the responsibility of paying capital gains taxes is wonderful within itself.
We buy houses in Massachusetts in any condition and pay fair cash offers and offer closings as fast as 10 days! We are here for you to sell your home, as-is for cash. Feel free to contact us if you are looking to sell your home quickly so we can help you as best as we can. You can also reach us via phone at 781-309-7085.