The reality is that there are many tax implications when purchasing or selling real estate in South Carolina. One area where real estate investors and homeowners can sometimes find themselves afoul is the capital gains tax – a complicated subject matter, which has so far been difficult for most people to understand without professional help from someone who knows what they’re doing! However, don’t worry because we’ve laid out this guide on how you should proceed with your next investment property purchase wisely as well as understanding other potential pitfalls before it’s too late…
Before we dive in, we always recommend speaking with your accountant, CPA, or legal tax-based professional for a clear understanding of your specific situation.
Understanding Federal Capital Gains.
Capital Gains tax usually applies in one of two scenarios federally:
1. You sell real estate that is NOT considered your personal property.
2. The sale of your primary residence results in a taxable gain of $250,000+ for single filers or $500,000+ for joint filers.
Please note, some exclusions may apply. As an example, folks in the military on extended duty may elect to suspend the 5 year deadline for up to 10 years.
How to calculate a Capital Gain or Capital Loss.
The three-step process for calculating capital gains is as follows:
1. Determine your basis. This is the original purchase price plus fees plus improvements.
2. Determine your realized amount. This is the sales price minus fees (your net).
3. Determine your Gain or Loss by subtracting your realized amount from your basis.
Understanding State of South Carolina Capital Gains Tax.
If you’re looking to sell your home in South Carolina or consider buying an investment property here, it’s important to understand the state’s capital gains tax.
South Carolina’s long-term Capital Gains Tax Rate is 7% of your gain (see above to calculate this on your own). That being said, 44% of the capital gain is exempt. In other words, you’re actually paying 3.92% of your realized gain to South Carolina. In other words, if you have a gain of $100,000 then you’ll pay $3,920 in real estate capital gains tax (3.92% of $100,000).
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Can You Avoid or Prevent Capital Gains Tax?
Yes and no. Section 121 of the tax code for South Carolina allows single filers to exempt the first $250,000 gain from being subject to capital gains tax ($500,000 if you file jointly). But that’s just for primary residences.
Any sale of real estate other than your primary residence should consider a 1031 Tax-Deferred Exchange. This process allows you to “defer” paying capital gains tax by rolling your taxable gain into another, like-kind property. You can’t “eliminate” capital gains tax, but you can “put if off” by rolling your proceeds into another property.
This is not nearly as complex a scenario as people might be led to believe, but there are some details you’ll need to be aware of. The key to success is to start with the right team (Realtor, Closing Attorney, and a Qualified Intermediary) to help point you in the right direction.
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