Introduction
Selling an asset can be challenging in terms of knowing what sort of taxes you can expect to pay on your profits.
Many people who hope to sell an asset are confused about capital gains taxes. What they are, how they’re calculated, and how to avoid them is often a puzzle that many sellers are not ready to solve.
Additionally, some states have their own laws when it comes to selling an asset, which is referred to as a capital gains tax. Wisconsin is one of those states, so if you live in the area, it’s important to learn about how Wisconsin capital gains tax laws work.
Wisconsin Capital Gains Tax – All You Should Know
The Basics of Capital Gains Taxes
Before explaining what capital gains taxes are, it’s important to explain what capital gains are and what may count as capital gains.
Capital gains refer to the profits that a person earns after selling a capital asset that has increased in value since the original purchase, which may include property like homes or vehicles, stocks, or bonds. After selling a capital asset, the capital gains tax is triggered and the seller is taxed some portion of the profits made.
It’s worth noting that capital gains taxes are only triggered upon the sale of an asset, not when the asset is held.
A property becomes subject to capital gains tax if it has become more valuable than the price it was purchased for originally.
Wisconsin’s Capital Gains Tax Policy
Wisconsin capital gains tax may not be ideal for investors, but it is far fairer than the capital gains tax rates of many other states. Wisconsin ranks at number 10 in a list of all 50 states when it comes to capital gains rates. The Wisconsin capital gains tax rate favors the seller better than the rates of Iowa, Vermont, New York, Washington D.C., Minnesota, Oregon, New Jersey, Hawaii, and California.
In Wisconsin, the capital gains tax rates are listed as follows:
- State tax: 65%
- Local tax: 0%
- Deduction: 30% exclusion
- Combined rate:65% (which does not account for the 30% exclusion)
The standard deduction phases out by 12% for single filers at $15,660 and at nearly 19.8% for married couples filing jointly at $22,600.
Standard deductions can phase out to 0% at $106,160 for singles and $124,279 for married couples filing jointly.
To explain the deduction further, Wisconsin law typically allows deductions for 30% of the net capital gain from long-term assets. This deduction can be up to 60% of the net capital gain from long-term farm-related assets.
How Are Capital Gains Taxed?
Selling an asset like property, a vehicle, stocks, or bonds is considered a source of income, and as such, Wisconsin capital gains tax works similarly to income tax.
When an individual sells an asset they’ve held for a certain period of time (less than or greater than 12 months), he or she is subject to being taxed for that income.
Often, capital gains taxes are calculated based on the original price of the asset, and on how long the seller held the investment before selling.
For Wisconsin capital gains tax, investors can fare better after selling an asset that has been held for over one year. Typically, capital gains tax in Wisconsin is even more favorable for investors who hold an asset for significantly longer than one year.
Determining Your Wisconsin Capital Gains Tax
When trying to figure out how much you can expect to pay in Wisconsin capital gains taxes, you should first determine whether you’ve sold a short-term capital gain or a long-term capital gain. Determining this qualification involves looking at the date you purchased the asset and the date you sold the asset.
After that, determine how much income you received throughout the past year and make a note of your tax filing status. These two pieces of information will help you determine your tax bracket and current tax rate.
Short-term capital gains are taxed as regular income while long-term capital gains are somewhat more complicated to tax. Wisconsin capital gains tax rates in this scenario are usually taxed up to 20% but may receive higher rates in some situations, or rates as low as 0%.
Wisconsin Capital Gains Tax Examples
Based on one capital gains calculator on SmartAsset’s website, let’s look at a couple of capital gains examples. If you purchase a property originally for $73,000 and you sell it later for $112,300, there are several things that will impact the amount of tax you pay.
If you sold the property more than a year after buying it, you qualify for the long-term tax rate. If you’re also married filing jointly, this may help reduce your capital gains tax as well.
If you make $54,200 annually, your capital gains tax will be about $1,725.
On the other hand, if you’re single and you sold the property after holding for less than a year, you would be taxed in terms of short-term capital gains.
If the purchase price and sales price were the same, you might pay around $11,110 in capital gains tax in Wisconsin.
In another scenario, if you’re married and filing jointly but you and your spouse make $200,000 annually, your taxes will be higher. If you hold the property for more than a year and sell it for the same price as mentioned above, you may pay $7,600 in capital gains taxes.
With this income, a married couple would pay $11,896 if the asset was sold in less than one year, and a single individual would pay nearly $17,000 in capital gains taxes.
Types of Capital Gains (Short and Long-Term)
When learning about Wisconsin capital gains tax, it’s important to realize that there are two types of capital gains. These types are categorized as either long-term capital gains or short-term capital gains. Each of the two types come with different tax rates.
- Short-term capital gains count as the profits from asset sales that have been held for less than a year. These gains are taxed as regular income, and they follow the seller’s income tax rate.
- Long-term capital gains are the profits from the sale of assets that were held for longer than one year before being sold. These gains can have a tax rate of up to 20% of the profit.
The taxable amount is usually determined by cost basis, which means that the original purchase price is adjusted for improvements made, taxes paid, fees, depreciation, etc.
In some cases, sellers can qualify for an exemption, meaning that they’re taxed at 0%. This exemption occurs
How To Avoid A Capital Gains Tax On Your Wisconsin Home
It’s understandable that when an individual or couple sells an asset, they want to keep as much of their profits as possible. Fortunately, there are several ways to strategize your asset sale in order to avoid capital gains taxes, or at least make your tax responsibility less than it has to be.
Sell An Asset As A Primary Residence
In order to have a property qualify as a primary residence, you must have lived in your home for two or more of the last five years. Those two years do not have to be consecutive.
It’s worth noting that you don’t have to have owned your home for five years or more to claim the exemption. If you owned your home for three or four years and lived in it for two, it’s still legally considered to be your primary residence.
You can avoid expensive capital gains taxes if you meet the following criteria:
- You have not claimed another deduction on the property for the past two years.
- You have owned your property for at least two years
- As mentioned above, you have lived at the residence for at least two years.
Remember, this qualifies for primary residences only. If you’re selling an investment property or a second home, these tips do not apply.
Keep Track of Real Estate Records
If you’re selling real estate as an asset, keep track of your financial records regarding the property. Maintain records of repairs and renovations made to the property, as well as any other improvements you have made to the asset.
You can claim deductions on the property, as well as deducting certain losses when the time comes to sell the asset.
Speak To A Wisconsin Tax Professional
Reading up-to-date articles online as often as possible and informing yourself about Wisconsin capital gains tax laws can be beneficial in helping you understand the way that capital gains taxes work.
However, it’s highly advisable to consult with a tax professional in your locality. Practicing tax professionals are constantly learning about new strategies, laws, and information surrounding their state’s tax laws. As such, they are the most knowledgeable resource you can utilize when it comes to making smart tax decisions.
A tax professional will be able to inform you about your unique situation’s opportunities and advise you on steps you should take in order to benefit from Wisconsin capital gains tax laws.
Conclusion
Even after briefly explaining Wisconsin capital gains tax laws, it can be confusing to apply those laws to your own asset sale.
Taxes are not a simple subject, and even when they make sense when explained in short guides, they can get very complicated in practice.
If you’re planning to sell an asset in Wisconsin, it’s in your best interest to be aware of the different laws that will apply to your sale. Speak with a Wisconsin tax professional for advice about the best possible choice you can make as an investor. Having knowledgeable advice from a professional can help you keep as much of your profits as possible.