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 look at how capital gains taxes work in the U.S. and other countries. We will 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 higher in many European countries. In Denmark, for example, the highest 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 do not impose capital gains taxes 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 on 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 selling 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 provides 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 move out of their PPOR and then rent it out. There are some qualifying conditions for leaving your principal place of residence. These conditions include taking a job overseas, caring for a sick relative, or going on 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
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 move out of their PPOR and then rent it out. There are some qualifying conditions for leaving your principal place of residence.
What is the 6 year exemption rule? ›
This means that you would be able to sell the property within the six-year period and be exempt from paying capital gains tax just as you would if you sold the house considered your main residence. The six-year absence rule exists because there are many reasons why you may not be living in your property for some time.
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.
At what age do you not pay capital gains? ›
Capital Gains Tax for People Over 65. 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 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.
What is the capital gains tax for people over 65? ›
The capital gains tax over 65 is a tax that applies to taxable capital gains realized by individuals over the age of 65. The tax rate starts at 0% for long-term capital gains on assets held for more than one year and 15% for short-term capital gains on assets held for less than one year.
What is the exemption for capital gains tax? ›
Capital gains tax rates
A capital gains rate of 0% applies if your taxable income is less than or equal to: $44,625 for single and married filing separately; $89,250 for married filing jointly and qualifying surviving spouse; and. $59,750 for head of household.
Can I sell my house and buy another without paying capital gains? ›
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.
Can I sell a second home and not pay capital gains? ›
You cannot depreciate a vacation home, which is considered personal property. But because it's a second property, when you sell, it is fully taxable at the capital gains rate as an investment.
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.
The capital gains exclusion applies to your principal residence, and while you may only have one of those at a time, you may have more than one during your lifetime. There is no longer a one-time exemption—that was the old rule, but it changed in 1997.
How much can a 70 year old earn without paying taxes? ›
For retirees 65 and older, here's when you can stop filing taxes: Single retirees who earn less than $14,250. Married retirees filing jointly, who earn less than $26,450 if one spouse is 65 or older or who earn less than $27,800 if both spouses are age 65 or older. Married retirees filing separately who earn less than ...
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.
How to avoid capital gains when selling a house? ›
The only way to avoid capital gains taxes is to sell your home for less than you paid for it. If you sell it for more than you paid, you will have to pay taxes on the profits.
Do you always get a 1099-S when you sell your house? ›
Do You Always Get a 1099-S When You Sell A House? You may not always receive a 1099-S form. When selling your home, you may have signed a form certifying you will not have a taxable gain on the sale.
What home improvements are tax deductible when selling IRS? ›
Qualifying home renovations may include upgrading exterior doors, windows, skylights and insulation materials or replacing central air conditioners, water heaters or furnaces with more energy-efficient versions.
How does the 6 year rule work? ›
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'.
How long can you go exempt on federal taxes? ›
A Form W-4 claiming exemption from withholding is valid for only the calendar year in which it's furnished to the employer. To continue to be exempt from withholding in the next year, an employee must give you a new Form W-4 claiming exempt status by February 15 of that year.
What does exemption to the rule mean? ›
To exempt a person or thing from a particular rule, duty, or obligation means to state officially that they are not bound or affected by it.
What is the exemption limit for? ›
The basic exemption limit for individuals under 60 to file an ITR is Rs 2.5 lakh gross income within a financial year under the old regime and Rs 3 lakh as per the new regime.
