Do You Pay Capital Gains Tax in Florida?
While Florida does not have a state-level tax on investment profits, federal tax obligations on the sale of assets like stocks or property still apply.
A capital gain is the profit realized from selling an asset for more than its original purchase price. The gain is not the total money received from the sale, but the difference between the selling price and the asset’s original cost. This applies to assets like stocks, bonds, and real estate.
Florida’s Position on Capital Gains Tax
Florida does not impose a state-level capital gains tax on individuals, as the state does not have a personal income tax. Residents are not required to pay any state tax on profits from the sale of assets like stocks, bonds, or real estate. This applies regardless of whether the individual is a long-term resident or an out-of-state property owner.
It is important to distinguish this from other taxes related to property transactions. When real estate is sold in Florida, the transaction is subject to a Documentary Stamp Tax, which functions as a real estate transfer tax. This tax is calculated based on the property’s sale price at a rate of $0.70 for every $100 of value. This is a tax on the transaction itself, not on the profit realized from the sale, and is therefore distinct from a capital gains tax.
Understanding Federal Capital Gains Tax
While Florida residents are free from state-level capital gains tax, they are still subject to federal tax laws. The Internal Revenue Service (IRS) requires individuals to pay taxes on profits from the sale of capital assets. The amount of taxable gain is determined by subtracting the asset’s cost basis from its sale price. The cost basis is the original purchase price plus any associated costs, such as commissions or costs of improvements.
The federal tax treatment of a capital gain depends on the holding period of the asset. The IRS divides gains into two categories: short-term and long-term. A short-term capital gain results from the sale of an asset held for one year or less, while a long-term capital gain comes from an asset held for more than one year.
Short-term capital gains are taxed at an individual’s ordinary income tax rates. This means the profit is added to your other income and taxed according to the standard federal income tax brackets, which can be as high as 37%. In contrast, long-term capital gains are taxed at preferential rates of 0%, 15%, or 20%, with the specific rate determined by the taxpayer’s total taxable income.
Reporting Federal Capital Gains
Taxpayers must report capital gains and losses to the IRS on Schedule D (Capital Gains and Losses), which is attached to the annual Form 1040 tax return. Schedule D is used to summarize the total gains and losses from all of your investment sales for the year.
Before filling out Schedule D, you must first complete Form 8949 (Sales and Other Dispositions of Capital Assets). This form is used to provide detailed information about each asset sale, including the description of the property, the dates you acquired and sold it, the sales price, and the cost basis. The totals from Form 8949 are then transferred to Schedule D to calculate your net capital gain or loss.
A federal provision allows homeowners to exclude a substantial amount of capital gain from the sale of their main home. An individual can exclude up to $250,000 of gain, and married couples filing jointly can exclude up to $500,000. To qualify, you must have owned and used the home as your primary residence for at least two of the five years preceding the sale. If the exclusion covers the entire gain, the sale may not need to be reported on your tax return.