Investing in stocks, businesses, or real estate is a terrific way to generate wealth, but it’s crucial to think about the tax implications. This is when capital gains tax enters the picture. Although the federal capital gains tax receives greater attention, several states levy their own capital gains tax.
The good news in Florida is that it does not apply a capital gains tax on its residents. This means that if you sell an asset for a profit, you won’t have to pay any additional state taxes on top of what you owe the federal government.
However, arranging for taxes when making investments is still critical, especially in real estate. For example, on real estate sales in Florida, you may still be subject to federal short-term or long-term capital gains tax.
A financial advisor can assist you in navigating the complex world of taxes and investing in order to minimize your responsibilities and maximize your earnings. This updated guide to capital gains tax in Florida seeks to provide a complete understanding of the most recent regulations, exemptions, and deductions available to Florida taxpayers.
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What Is Capital Gains Tax?
Capital gains tax applies to both legal businesses and individuals. It is levied on an investor’s profit on the sale of an asset. The amount of tax owing is determined by the difference between the asset’s sale price and its initial acquisition price.
If the sale price exceeds the purchase price, a tax payment to the state budget is needed. It’s also worth noting that if the use of capital results in a profit, as in the case of dividend-paying stocks, a tax payment requirement arises.
How Much Is Capital Gains Tax in Florida?
Because the state of Florida does not levy any taxes on capital gains, the amount you pay is based on federal tax rates. Several factors influence your tax rate, including your filing status, federal tax bracket, length of homeownership, and kind of property.
Short-term capital gains are taxed like ordinary income if the property is owned for less than a year, whereas long-term gains are taxed at a lower rate if the property is owned for more than a year. To minimize the tax burden, it is necessary to own a property for an extended period of time and understand how to file taxes as a non-resident or avoid capital gains tax in Florida.
Federal Capital Gains Tax Florida: How Does It Work?
Capital gains are taxed at different rates in the United States, depending on how long you owned the investment. The relevance of federal capital gains tax may be linked to two major considerations.
It mostly serves as a motivator for individuals to invest in various assets and keep them over time. This is especially obvious in the case of stocks and real estate, where investors are incentivized to hold onto their investments for longer periods of time in order to gain bigger advantages.
Second, the federal capital gains tax is an important income source for the government. The proceeds from this tax are used to fund a variety of programs and activities aimed at increasing the general economy. Let’s get to know about the different kinds of capital gains tax in Florida available;
Short-Term Capital Gains Tax Florida
The tax brackets that apply to short-term capital gains are the same as those that apply to regular income taxes. The current tax brackets for the fiscal year 2022-2023 range from 10% to 37%, with various rates in between.
It should be noted that these rates are subject to change based on the relevant tax authorities’ rules and regulations. Here’s a visual chart for a better understanding of short-term capital gains;
| Rate | Single | Married Filing Jointly | Married Filing Seperately | Head of Household |
|---|---|---|---|---|
|
10% |
$0 -$9,950 |
$0 -$19,900 |
$0 -$9,950 |
$0 -$14,200 |
|
12% |
$9,951 - $40,525 |
$19,901 - $81,050 |
$9,951 - $40,525 |
$14,201 - $54,200 |
|
22% |
$40,526 - $86,375 |
$81,051 - $172,750 |
$40,526 - $86,375 |
$54,201 - $86,350 |
|
24% |
$86,376 - $164,925 |
$172,751 - $329,850 |
$86,376 - $164,925 |
$86,351 - $164,900 |
|
32% |
$164,926 - $209,425 |
$329,851 - $418,850 |
$164,926 - $209,425 |
$164,901 - $209,400 |
|
35% |
$209,426 - $523,600 |
$418,851 - $628,300 |
$209,426 - $314,150 |
$209,401 - $523,600 |
|
37% |
$523,601+ |
$628,301+ |
$314,151+ |
$523,601+ |
Florida Long-Term Capital Gains Tax
Long-term capital gains, on the other hand, generated on investments held for more than a year, are taxed at a reduced rate. This encourages investors to retain their assets for longer periods of time, perhaps resulting in more favorable tax treatment and better total returns. The tax rate on long-term capital gains is determined by your income and can range from 0% to 20%.
Individual filers’ capital gains tax rate will be decided by their total taxable income beginning in 2023. Those with taxable income of $44,625 or less are exempt from paying capital gains tax. However, for taxpayers with incomes ranging from $44,626 to $492,300, the capital gains tax rate rises to 15%. If a person’s taxable income surpasses $492,300, the rate rises to 20%.
For a better understanding, here’s the 2023 chart for different categories of long-term capital gains that you can refer to:
| Filing Status | 0% Rate | 15% Rate | 20% Rate |
|---|---|---|---|
|
Single |
Up to $44,625 |
$44,626 - $492,300 |
Over $492,300 |
|
Married filing jointly |
Up to $89,250 |
$89,251 - $553,850 |
Over $553,850 |
|
Married filing separately |
Up to $44,625 |
$44,626 - $276,900 |
Over $276,900 |
|
Head of household |
Up to $59,750 |
$59,751 - $523,050 |
Over $523,050 |
It should be noted that these rates are subject to change and may be influenced by future tax policies and legislation. Furthermore, capital gains may be subject to the net investment income tax (NIIT), a 3.8 percent supplementary charge for persons whose income exceeds specific levels. These criteria differ based on the filer’s status, such as whether they are filing as an individual or as a married couple filing jointly.
Capital Gains Tax Florida Non-Resident
One perk of investing in real estate in Florida is that both residents and non-residents are exempt from capital gains tax. This implies that if you are a snowbird who owns a property in Florida as a second home, any earnings you make from selling it will not be subject to capital gains tax.
This is especially beneficial for people who just spend a portion of the year in Florida, since they may reap the benefits of owning a property in a popular vacation area without incurring additional tax obligations. While Florida does not have a state-level capital gains tax, there may be federal capital gains tax obligations to consider.
Florida Capital Gains Tax on Real Estate
Capital Gains Tax on Home Sales in Florida
If you’re thinking about selling a home in Florida, you should be aware of the tax ramifications. The Internal Revenue Service (IRS) has instituted an ownership and usage test to avoid capital gains taxes on the sale of your principal residence. If you pass the test, you may not have to pay taxes on the wholesale price of your house.
The ownership and usage test, sometimes known as the “2 out of 5-year rule,” states that the property must have been your principal residence for two out of the past five years and be registered in your name. If you meet these requirements, you may exclude up to $250,000 in capital gains, or up to $500,000 if you file jointly.
Consider the tenure of your property owner to determine how much capital gains tax you may owe. For example, if you have held the property for less than a year, the profits will be taxed as ordinary income, however, if you have owned it for more than a year, the gains would be taxed at the capital gains rate, which is usually lower.
Here’s an instance of the amount of capital gains tax that you could be liable to pay based on whether you have owned the property for a period exceeding or falling short of 12 months:
| Home Sale Profits* | Short-term Tax* | Long-term Tax* |
|---|---|---|
|
$10,000 |
$3,200 |
$1,500 |
|
$30,000 |
$9,600 |
$4,500 |
|
$50,000 |
$16,000 |
$7,500 |
Note:
*Following IRS exemption.
**Your effective tax rate is determined by your taxable income, submission categorization, and other factors. Consult a professional public accountant to determine your real capital gains tax rate.
Capital Gains Tax Florida Investment Property
When considering the sale of a Florida-based property, there are a few things to keep in mind that might assist you to avoid capital gains tax.
Primarily, if you have owned the property for more than a year, you may be eligible for the long-term capital gains tax rate, which is normally lower than the short-term capital gains tax rate.
Furthermore, if you’re selling a rental or investment property, a 1031 exchange may allow you to avoid paying capital gains tax entirely. This implies you may sell the property and reinvest the proceeds in another property without incurring any tax liability. The chart below shows the short-term or long-term tax you could pay depending on the profits made;
| Home Sale Profits* | Short-term Tax* | Long-term Tax* |
|---|---|---|
|
$40,000 |
$12,800 |
$6,000 |
|
$60,000 |
$19,200 |
$9,000 |
|
$80,000 |
$25,600 |
$12,000 |
How Do I Avoid Capital Gains Tax in Florida?
Because Florida does not have its own capital gains tax, the regulations follow the federal structure. According to the Internal Revenue Service, it is possible to avoid capital gains tax in the state of Florida, subject to certain conditions. These restrictions are usually determined by the type of property you own and your tax filing status.
If you decide to sell your Florida home, you may be eligible for a real estate tax exemption. This waiver applies if you meet the “ownership and usage test,” as defined by the Internal Revenue Service (IRS):
- You must have owned the property for at least two of the last five years.
- You must have lived there as your principal residence for at least two of the previous five years.
The two-year period does not have to be consecutive. If you meet the aforementioned conditions, the IRS enables you to exclude up to $250,000 in capital gains from the sale of your house (or up to $500,000 if you file a joint tax return as a married person).
According to the Internal Revenue Service (IRS), the two-year period does not have to be consecutive. Additionally, veterans and active military members have an edge. If you or your partner are on official leave, you can postpone the five-year test for up to a decade.
There is also the possibility of obtaining a partial exclusion under certain conditions. A partial exclusion could be possible if you’re selling your home for a specific reason, such as:
- Relocating the workplace
- Concerns about one’s health
- Unexpected events
The IRS determines a partial exclusion based on the length of time you owned and lived in the house, as well as whether you previously excluded capital gains from the sale of another property.
How to Avoid Florida Capital Gains Taxes Additional Property
Avoiding capital gains tax on rental or other assets might be difficult. Nonetheless, you have three choices:
Qualify for the IRS exclusion by designating it as your primary residence for two of the five years before the sale.
Facilitate the 1031 exchange by purchasing another comparable property and sidestep capital gains tax payment at present.
Refrain from paying capital gains tax by investing in property located in a distressed area, taking advantage of the Opportunity Zone tax incentive introduced by the Tax Cuts and Jobs Act.
Sell Your Home for Cash
Capital gains tax can be an intricate process for those unfamiliar with the procedures. Fortunately, a proficient real estate agent can aid you in surmounting the legal and financial obstacles that may arise.
And this is where Level One Investments come in. they can help you analyze your situation to determine if it’s possible to avoid federal capital gains in Florida. Apart from this, they can help you with the right steps to take if the home you’re about to sell isn’t your place of dwelling. They have an in-house team of finance professionals to help you determine the numbers and whether it will bring a favorable outcome or not.
When you contact Level One Investments before selling your home in Florida, you have nothing to worry about because you are with the right team with proven track records. At Level One Investments, you will get access to professional real estate investors in Florida ready to buy your home. You don’t have to worry about anything. The team at Level One Investments is transparent and is ever ready to save you a huge chunk of money on your real estate.
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We Buy Houses in Florida in 7 days!
Conclusion
There is no state-level capital gains tax in Florida since residents are not required to pay state income taxes. However, you will still be required to pay the federal capital gains tax, the amount of which is based on the length of your investment, if you make any money from your investments. You must be conscious of your duty to pay federal capital gains tax when you sell your investments, even though Florida offers significant tax incentives.
Table of Contents
FAQ
Most frequent questions and answers
How long do you have to live in a house in Florida to avoid capital gains tax?
Provided you have used the property as your main home for a cumulative period of two years within the past five years before the sale, you could be entitled to avoid capital gains tax of up to $250,000, or $500,000 if you are married.
Do I have to pay capital gains when I sell my house in Florida?
Florida does not have a state-level capital gains tax, but you may have to pay federal capital gains tax when you sell your home there. The principal residence exemption, for example, enables taxpayers to avoid paying any capital gains tax at all.
