How to Avoid Capital Gains on Investment Property
Oct 01, 2021 | Jeremy Duprey
One of the big challenges for people who get into real estate investment is how to avoid capital gains tax. If you have to pay this tax, it can take a chunk out of your profit. However, there is a way to legally avoid it to keep more money in your pocket.
What is Capital Gains Tax?
Capital gains tax is the tax you pay based on the difference between the amount you paid for the property and the amount you sell it for. Basically, it is a percentage of your profit. For instance, if you buy a house for $100,000 and sell it for $180,000, you will pay a capital gains tax on the $80,000.
This tax is a progressive tax, which means it has multiple rates based on the amount of profit. The rates increase the more you earn. So, with the example above, you could pay a 10 percent tax on the first $10,000, 12 percent on the next $20,000, and 20 percent on the rest.
The amount you’ll pay in capital gains taxes depends on your filing status and taxable income. It also varies based on how long you’ve owned the property. Short-term capital gains tax is charged for property owned less than a year while all property owned longer than a year is considered long-term capital gains, which is usually a lower percentage.
How to Reduce or Eliminate Capital Gains Tax on Investment Property?
There are a few options to help you avoid having to pay taxes if you own rental property and sell it. One option is the 1031 Real Estate Exchange. This allows you to sell one rental property and buy another one within a short time frame.
You can also offset those profits with any losses you’ve incurred in your investments. If you suffered a loss in other investments, the amount will be deducted from your profit with a rental property.
If you sell the property at a loss, you won’t need to pay a capital gains tax. You will need to calculate the deductions to determine the amount of loss.
Do you need to sell your rental property, but you’re worried about the hidden costs of capital gains? Talk to the team at Hometown Development about selling. We have decades of experience in real estate investments, and we can help you get the property off your hands without the hassle of capital gains taxes.