Reducing or Avoiding Capital Gains Tax on Home Sales

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sale tax payable

Deferrals of capital gains tax are allowed for investment properties under the 1031 exchange if the proceeds from the sale are used to purchase a like-kind investment. As a married couple filing jointly, they were able to exclude $500,000 of the capital gains, leaving $200,000 subject to capital gains tax. By comparison, a recently married couple filing jointly sells their primary residence, which is owned by one spouse. The owner’s spouse has lived in the house for 24 months out of the previous five years, but the non-owner spouse has only lived in the house for 12 months out of the five years. This couple would not qualify for the $500,000 exclusion, just the $250,000 exclusion for the owner who met the residence requirement.

sale tax payable

How to Figure Out Sales Tax

In bookkeeping, diligent tracking of sales tax is indispensable for passing audits and adhering to legislative standards. Records must be painstakingly kept and compliance should be ensured to prevent legal complications. Kristin is a Certified Public Accountant with 15 years of experience working with small business owners in all aspects of business building. In 2006, she obtained her MS in Accounting and Taxation and was diagnosed with Hodgkin’s Lymphoma two months later.

Adjusting for Discounts and Returns

The sales taxes payable accounts are divided into different sections, given the demand for such taxes to be paid by customers to different authorities. In other words, the entity acts as the custodian of the sales taxes collected from customers and is obligated to remit the same to the government at regular intervals of time. The sales tax payable account is reported in the current liability section of the balance sheet until the tax is paid. Every business is responsible for paying income taxes, but there is no federal sales tax in the United States.

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  • An owner’s principal residence is the real estate used as the primary location in which they live.

Collecting and Handling Sales Tax

Some states charge sales tax on food consumed in restaurants, while orders “to go” are free of sales tax. You just have to remember that there’s the revenue portion and then we collect a little extra which is the sales tax, which is a liability until we pay it to the government. So we’ll continue to see that liability until we pay it to the government, okay? So let’s pause here, and we’ll continue with another little tidbit about sales tax in the next video. Therefore, after Angie recently sold a $200 surfboard, she collected a sales tax of $12 (0.06 x $200).

As a result of the above transaction, the outstanding amount of sales taxes payable on the liability side reduces by the same amount as the cash balance on the asset side. Sales tax filers, taxable income please validate the business location address shown on your permit to ensure local tax is being accurately reported. Collecting and paying the correct local tax rate is your responsibility.

Sales taxes payable is a short-term liability account as the amount gets remitted over a period. Sales taxes refer to the taxes collected by government tax authorities on selling certain goods and services. Typically, firms, companies, and individuals collect sales taxes from customers when they sell goods or services.

Five states — Alaska, Delaware, Montana, New Hampshire and Oregon — have no state sales tax at all, but merchants in some Alaskan cities must charge a local sales tax. Merchants also have to be familiar with any special tax rules that govern their industry. Each state has different rules and requirements, so it’s best to check with the state you do business in to understand their requirements. They received a total of $110.00 from their customer which they recorded in their Cash account (if the customer paid in cash) or in their Accounts Receivable account (if the customer paid on credit). The business now has to pay the collected sales taxes to the relevant taxing authorities. When the business receives the sales taxes, a credit is made to the sales taxes payable account and debits the cash account.

Since the business is collecting sales tax on behalf of tax authorities, the tax is not recorded as a part of the revenue. Being classified as an investment property, rather than as a second home, affects how it’s taxed and which tax deductions, such as mortgage interest deductions, can be claimed. Under the Tax Cuts and Jobs Act (TCJA) of 2017, up to $750,000 of mortgage interest on a principal residence or vacation home can be deducted.

$19,200 is the amount extra that we collected to remit to the government. The cash actually collected well, it’s the $240,000 in sales plus the $19,200 in taxes. That’s the total of our revenue plus the sales tax we collected. And then we have our credit to revenue for the amount of revenue we had, right? It wouldn’t be the whole $259,200 because that’s not all revenue.

In addition to the $250,000 (or $500,000 for a couple) exemption, you can also subtract your full cost basis in the property from the sales price. Your cost basis is calculated by starting with the price you paid for the home, and then adding purchase expenses, such as closing costs, title insurance, and any settlement fees. If you sell below-market to a relative or friend, the transaction may subject the recipient to taxes on the difference, which the IRS may consider a gift. The capital gains are allocated to the entire period of ownership. While serving as a rental property, the allocated portion falls under non-qualifying use and is not eligible for the exclusion. For taxpayers with more than one home, a key point is determining which is the principal residence.

Each state has specific filing schedules, and these are often tied to your sales volume. For instance, if you’re collecting under $100 in tax monthly, you may only need to file quarterly, while higher monthly collections could mean filing monthly. To calculate sales tax, first convert the sales tax from a percentage to a decimal by moving the decimal 2 places to the left. Then multiply the cost of the item or service by that decimal to get the sales tax. Sales tax is NOT a business expense since it is a payment of customers’ money to the sales tax agency rather than the business’s money.

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