Capital Gains Tax on Real Estate in Arkansas

When you sell a piece of real estate in Arkansas for more than you paid for it, the resulting profit is known as a capital gain. This gain is a form of income and can be subject to taxation at both the federal and state levels. The amount of tax owed depends on several factors, including the profit size, how long you owned the property, and how you used it. Both the Internal Revenue Service (IRS) and the Arkansas Department of Finance and Administration have distinct regulations for this income.

Calculating Your Capital Gain on Arkansas Real Estate

The first step in understanding your tax situation is to calculate the capital gain. The formula is the property’s selling price minus its adjusted basis. The selling price is the total amount you received for the property, which is found on the closing documents. The adjusted basis is more than just the original price you paid.

Your property’s adjusted basis starts with the original purchase price. From there, you add certain buying costs, such as abstract fees, legal fees, recording fees, and surveys. You also increase your basis by the cost of capital improvements, which are distinct from routine repairs. An improvement adds value to the home or prolongs its life, like adding a deck or installing a new HVAC system.

Routine maintenance, such as fixing a broken window or painting a room, cannot be added to your basis. If the property was used for business or as a rental, the calculation is different. The total amount of depreciation you claimed over the years must be subtracted from your basis, which can increase your taxable gain upon sale.

Federal Capital Gains Tax on Real Estate

Federal tax on capital gains depends on how long you owned the asset. Profit from property owned for one year or less is a short-term capital gain, taxed at your ordinary income rates. Profit from property owned for more than one year is a long-term capital gain, subject to favorable rates of 0%, 15%, or 20%, depending on your income and filing status.

The IRS allows a primary residence sale exclusion of up to $250,000 for single filers and $500,000 for married couples filing jointly. To qualify, you must meet both an ownership test, having owned the home for two of the last five years, and a use test, having lived in it as a primary residence for two of the last five years.

The two years for each test do not have to be continuous. A partial exclusion may be allowed for a change in workplace, health issues, or other unforeseen circumstances. You can claim this exclusion only once every two years, and any gain that exceeds the exclusion amount is taxed.

Arkansas State Capital Gains Tax on Real Estate

Arkansas taxes capital gains from real estate but provides a significant benefit for long-term investments held for more than one year. The main feature is a 50% exclusion for net long-term capital gains, meaning you can deduct half of your profit from your taxable income.

The remaining 50% of the gain is added to your other income and taxed at Arkansas’s standard income tax rates, which top out at 3.9%. This makes the effective top tax rate on long-term real estate gains approximately 1.95%. Arkansas also conforms to the federal rules for the primary residence exclusion.

Reporting the Sale on Your Tax Returns

After calculating your gain, you must report the sale on your federal and state tax returns. You will need key documents from the sale, including the closing statement (a Closing Disclosure or HUD-1) and Form 1099-S, Proceeds from Real Estate Transactions, which reports the gross proceeds.

On your federal return, the sale is reported on Form 8949, Sales and Other Dispositions of Capital Assets. This form is where you list the transaction details, including dates, sales price, and your cost basis. The information from Form 8949 is then summarized on Schedule D (Form 1040).

For your state filing, the process mirrors the federal one. You will report the capital gain on Arkansas’s Schedule D, which is filed with the main state tax return, Form AR1000F. On this schedule, you will apply the state’s 50% exclusion for net long-term capital gains.