Understanding Capital Gains Tax and How to Take Advantage of It in Real Estate
We all have a responsibility to pay taxes to the government and thus, the tax reforms expected to be implemented might have an impact on everybody. While tax reform could come with negative impacts, it is also crucial that you focus on the positive side of it because you can save lots of money which could be taxed as part of your income. Property investors are one particular group that must be concerned about the tax reforms because it touches on the capital gains. This article discusses details of capital gain tax on real estate, and it would be beneficial to you if you intend to sell your property.
Let us start by understanding what it means by the capital gain tax. If you sell a property in the real estate, you are likely to make a profit from the proceeds. Capital gain is the profit that you make whenever you sell a property for an amount exceeding the cost of the property, and that benefit is taxable. The tax rate for the gain depends on whether it is a short-term capital gain or a long-term capital gain. Long-term gains are the profits from the sale of a property that you have held for a period exceeding one and its tax rate is on a scale of 0 to 20% depending on the amount that you realize from the transaction. It is important to note that in most cases, short-term capital gain tax rates are higher than long-term capital gain tax rates. You can also get an exclusion of $250,000 if you have sold a house that you have lived in for less than five years. If you have a spouse, then the amount to exclude doubles to $500,000.
How do you qualify to pay capital gain tax? However, you should know that you will pay high tax amount for short-term gains than the amount you pay for long-term benefits. The amount you pay is also determined by the taxable income that you earn, the increase in property value and the period which you have owned the property. Most of the calculations on capital gain tax are simplified by the use of taxation software.
How can you control the amount of money that you pay for capital gain tax? You can do this by postponing the sale of properties that you have held for less than a year so that they become long-term properties and qualify for favorable rates of tax. Since your taxable income also affects the rate of capital gains tax, you can reduce your taxable income by waiting to sell the property after retirement or waiting for your spouse to leave employment. If you cannot wait for that long period to retirement, you can convert your income to savings.