Capital gains?????
Could someone please explain the capital gains tax to me. Isn't there some clause about $250,000 being tax-free on a primary residence? Is there a different tax rate on an individual's CG and corp. CG? All info is greatly appreciated!!
Lynette
Lynette,
An S-corporation does not pay capital gains tax on the sale of real property. The shareholders receive an IRS form K-1 whereby the gains "pass through" to the shareholders. The capital gain is then reported on the shareholders' personal income tax returns.
A single member LLC is not a taxable entity. Capital gains earned by the LLC on the sale of real estate are passed through to its members. The members' capital gains taxes are calculated on their personal income tax returns.
With a C-corporation, the individual shareholder is not taxed on profits until they are distributed. The corporation itself pays tax on its income, but the first $50,000 of C-corporation income is only taxed at a 15% rate, which is much lower than personal income tax rates. I am not that familiar with corporate tax returns, but it is my understanding all income to the corporation is treated as ordinary corporate income (that is, no such thing as a capital gain tax rate for a C-Corp). When the corporation distributes its income to the shareholders (a dividend) the portion of the distribution that is attributed to long term capital gains is given the capital gains tax treatment on the shareholder's personal tax return, while the rest of the dividend is taxed as ordinary income. This is the "double taxation" of corporate income you hear about.
The profit on the sale of a taxpayers home that is also his primary residence is eligible for a capital gains exclusion of up to $250K per taxpayer provided certain qualifying criteria are met.