Many countries have implemented a capital gains tax, but capital gains tax rates and the tax structure itself vary greatly from one country to the next.
Capital gains taxes are generated when you sell an asset for a profit. Assets can be real property, precious metals, stocks, bonds, cryptocurrency, land, and similar holdings or resources.
In this article we’ll take a closer look at how capital gains taxes work in the U.S. and other countries, and we’ll also discuss some similarities and incongruities this tax shares among different government tax entities.
Capital Gains Taxes in Different Countries
In the U.S., capital gains taxes are capped at 20 percent if you’ve held an investment asset longer than one year and you are in the highest income bracket for married or single taxpayers.
Capital gains taxes are much higher in many European countries. In Denmark, for example, the highest top capital gains tax is 42 percent – the highest rate across the globe. Finland caps its capital gains tax at 34 percent, while France caps it at 30 percent with a 4-percent increase for high-income earners. Meanwhile, Belgium, Luxembourg, and Slovenia place no capital gains tax on profits generated from the sale of investment assets.
The way income is taxed varies greatly as well. In the U.S. you’ll generate a capital gains taxable event if you sell something for more than you paid for it – although many real estate investors use 1031 exchanges to defer paying their capital gains tax liabilities. In Great Britain, investors pay 28 percent capital gains tax from the sale of residential property, and 20 percent on “chargeable” assets such as business machinery and equipment, personal possessions, and business shares not held in a tax-free Individual Savings Account or Personal Equity Plan – the British equivalents of U.S. tax-preferred/tax-exempt Individual Retirement Accounts.
How often you’ll have to pay capital gains taxes when you sell certain investments in other countries varies as well.
Capital Gains Tax Exemptions in Certain Countries
For many U.S. taxpayers, their home is their largest capital asset. Homeowners typically are exempt from paying capital gains taxes on the sale of their homes under the Taxpayer Relief Act of 1997. This act provided an exemption of $250,000 for single taxpayers and $500,000 for married couples who file a joint return. In order to claim this important exemption, you must have lived in your home for two of the last five years, and you can only take the exemption once every two years.
Rules are different in other countries, though. In Australia there’s a six-year rule. Here’s how it works:
- Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they moved out of their PPOR and then rented it out. There are some qualifying conditions that have to be met for leaving your principal place of residence, though, such as taking a job overseas, caring for a sick relative, or taking an extended holiday. If you move back into the residence and leave again, the six-year rule is re-established from the date of your last move-out. If you own a property and don’t rent it out, you can take the exemption for longer than six years, the Australian Tax Office notes.
The Bottom Line
Capital gains taxes are determined by the country in which your investment assets are held and are subject to that country’s rules governing capital gains taxation. Consult with tax professionals experienced in domestic and foreign tax policies to determine your potential capital gains tax liabilities for assets held in other countries.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. All investments have an inherent level of risk. The value of your investment will fluctuate with the value of the underlying investments. You could receive back less than you initially invested and there is no guarantee that you will receive any income.
FAQs
If the home is a rental or investment property, use a 1031 exchange to roll the proceeds from the sale of that property into a like investment within 180 days.13.
How long do you have to reinvest money from sale of primary residence? ›
If the home is a rental or investment property, use a 1031 exchange to roll the proceeds from the sale of that property into a like investment within 180 days.13.
What is a simple trick for avoiding capital gains tax on real estate investments? ›
Use a 1031 exchange for real estate
Internal Revenue Code section 1031 provides a way to defer the capital gains tax on the profit you make on the sale of a rental property by rolling the proceeds of the sale into a new property.
Do I pay capital gains when I sell my house and buy another? ›
You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.
Do you have to pay capital gains after age 70 if you? ›
Whether you're 65 or 95, seniors must pay capital gains tax where it's due. This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the “tax basis.”
What is the 6 year rule? ›
If you use your former home to produce income (for example, you rent it out or make it available for rent), you can choose to treat it as your main residence for up to 6 years after you stop living in it. This is sometimes called the '6-year rule'. You can choose when to stop the period covered by your choice.
Can I avoid capital gains tax by reinvesting? ›
Reinvest in new property
The like-kind (aka "1031") exchange is a popular way to bypass capital gains taxes on investment property sales. With this transaction, you sell an investment property and buy another one of similar value. By doing so, you can defer owing capital gains taxes on the first property.
How to avoid paying capital gains tax on inherited property? ›
Here are five ways to avoid paying capital gains tax on inherited property.
- Sell the inherited property quickly. ...
- Make the inherited property your primary residence. ...
- Rent the inherited property. ...
- Disclaim the inherited property. ...
- Deduct selling expenses from capital gains.
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
What is the 2 out of 5 year rule? ›
When selling a primary residence property, capital gains from the sale can be deducted from the seller's owed taxes if the seller has lived in the property themselves for at least 2 of the previous 5 years leading up to the sale. That is the 2-out-of-5-years rule, in short.
If you owned and lived in the home for a total of two of the five years before the sale, then up to $250,000 of profit is tax-free (or up to $500,000 if you are married and file a joint return). If your profit exceeds the $250,000 or $500,000 limit, the excess is typically reported as a capital gain on Schedule D.
Do I have to pay capital gains tax immediately? ›
It is generally paid when your taxes are filed for the given tax year, not immediately upon selling an asset. Working with a financial advisor can help optimize your investment portfolio to minimize capital gains tax.
What are the two rules of exclusion on capital gains for homeowners? ›
Is there a way to avoid capital gains tax on the selling of a house? You will avoid capital gains tax if your profit on the sale is less than $250,000 (for single filers) or $500,000 (if you're married and filing jointly), provided it has been your primary residence for at least two of the past five years.
At what age can you avoid capital gains tax? ›
For individuals over 65, capital gains tax applies at 0% for long-term gains on assets held over a year and 15% for short-term gains under a year. Despite age, the IRS determines tax based on asset sale profits, with no special breaks for those 65 and older.
What is exempt from capital gains? ›
If you sell or give away personal belongings ('chattels') then there will be no CGT if your share of the proceeds or value when given away is less than £6,000. See Selling shares and other assets for more information. Please note, however, that company shares are not usually exempt from CGT.
How many years do you have to pay capital gains tax? ›
Owning your home for more than a year means you pay the long-term capital gains tax. After 2 years, you'll qualify for the personal exemption – more on that below. Unlike the seven short-term federal tax brackets, there are only three capital gains tax brackets.
How long do I have to buy another house to avoid capital gains? ›
Frequently Asked Questions about Capital Gains Tax
You might be able to defer capital gains by buying another home. As long as you sell your first investment property and apply your profits to the purchase of a new investment property within 180 days, you can defer taxes.
Do I have to report the sale of my primary residence to the IRS? ›
Report the sale or exchange of your main home on Form 8949, Sale and Other Dispositions of Capital Assets, if: You have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it, or. You received a Form 1099-S.
