What is a Capital Gains Tax?
A capital gains tax is a fee paid to the government when a property or something else of value is sold for more than the price it was bought for. For example, if you bought a house years ago at $300,000 and traded it for $400,000, you’d pay a portion of your $100,000 profit — or capital gains — to the government. Capital gains are dependent on the period property was owned for.
Short-term Capital Gains
Properties possessed for less than a year are eligible for short-term capital gains which are taxed at the same rate as ordinary income.
Long-term Capital Gains
Properties possessed for more than a year are eligible for long-term capital gains in which you get the benefit of a reduced tax rate that usually doesn’t exceed 20%.
Is Capital Gains Tax Only Applicable on Real Estate?
No. The IRS can obtain capital gains tax on any item whose sale allows you to gain profit, including investments, like bonds and stocks. However, most retirement accounts let you to delay giving taxes on earnings until you’re eligible to withdraw money.
Are Primary Residences Excluded from Capital Gains Tax?
Yes. The IRS permits you to scoop up to $250,000 off the profit of a primary residence when capital gains tax is calculated. If you are married the allowed amount ranges to $500,000.
How can I lessen Capital Gains Tax on a Property?
Here are a few strategies that can help you in reducing or minimizing capital gains tax on property.
Occupy Your Property as Primary Residence for at Least 2 Years
The most efficient workaround capital gains tax is to stay in your primary home for at least two of the five years before you trade it. However, this does not indicate that you must hold the property for a minimum of 5 years. If you maintain a property for 2 years as your primary residence, capital gains tax will be exempted.
Sell a Property After Experiencing Capital Losses
Tax rates are dependent on your income; hence if you’re going through a period in which you have made less income than usual; sell your property so that you can take advantage of a reduced rate.
Track Your Home Improvements or Selling Expenses
If you have made changes in your property, you can claim all the value you added to your house while residing there. Keep a record of money spent on upgrades and improvements and submit records and receipts while filing taxes.
Use Your Primary Residence for Rental Purposes
Renting your property is an attractive solution. However, to be exempt from the capital gains tax, limit the duration you rent it for. After three years, it’s deemed an investment property.
Is There Any Specific Exemption For an Investment Property?
Yes. 1031 Exchange was developed to stimulate investment in the real estate market and to urge investors to put their money back in the system. From a personal standpoint, this process will allow you to defer the capital gains tax on the trade of a property if you reinvest it in another like-kind property. However, some qualifications must be met to achieve a successful exchange.
The asset needs to be held for a year or longer to be eligible for the long-term capital gains tax rate as it is significantly lower than the short-term capital gains rate for most assets. A qualified intermediary usually handles the gains from the initial sale and securely retained into a trust. The investor gets 45 days to identify suitable like-kind replacement properties and to notify the IRS. The “reinvestment” or acquisition of the chosen properties must take place within 180 days of the sale of the initial property. If any of the guidelines laid by the IRS are not met, the money in the trust will be subject to the appropriate capital gains tax. You have a range of prospects for 1031 exchanges. Properties differing from small retail outlets to huge industrial complexes can pass; even smaller investments in investment grade real estate deeded as “tenants in common” (TICS) can qualify.
Engage Our Services For a Profitable 1031 Exchange and Defer Capital Gains Tax
1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature, and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our varied client base.
For consultation and assistance regarding 1031 exchange call – 888-993-2835 or email us at email@example.com.