Capital Gains Tax Explained

Finance

The real estate market is booming in the United States as never before. Properties – both residential and commercial – are being exchanged hands on a daily basis. There has been a huge demand for properties situated in preferential areas, and more and more people are filling their investment portfolios with these. Many of the investors who are recently in the market after a stint of investment in the early 1970s or 1980s are noting the difference, that investors are more concerned about saving on taxes compared to the time back then. The proof? Everyone is asking their tax advisers if there is a way to avoid taxes? The answer is, there certainly is. 

The elephant in the room when it comes to real estate investment is the capital gain tax – a tax imposed on gain from selling the property. Of course, everyone wants to avoid it because it can eat a big portion of the profit made. In fact, since a long time, this tax has been steadily at 20 percent and no one in their right mind would want to pay all of the taxes that IRS demands every year. The truth is that capital gains taxes can be legally deferred, even completely eliminated. How this is done is beyond the scope of this information because it is both simple and sophisticated. 

When an average person thinks of taxes, he or she is normally thinking about income taxes. But for IRS, taxes mean everything from income tax, to sales tax and taxes on wealth increase. Buying and selling properties is a huge business and the IRS does not want to let go of opportunities to make extra money. So, the wealth increase of the person is taxed – every bit of it. However, this tax called the capital gain tax can be bypassed with smart and legal moves. 

As mentioned earlier, the federal rate of capital gains tax has been stable at 20 percent. There are exceptions or lower tax rate for situations where the person falls under lower tax bracket. The general fact is that for an average investor, with an average income and ordinary capital gains, the federal tax rate right now is 20 percent. What about the state tax rate? Well, that is totally another matter. Every state has its own tax rate, some states being more favorable than others for property investors. In addition, each state has their own set of rules when it comes to capital gains tax deferral. 

So, what exactly is capital gains tax and is it so bad that every investor should aim to eliminate it? Should you be concerned about it when taking home loans in east Texas or any other region in the US? It depends. 

Capital gains tax is the tax on your capital assets, in this case, your property. It can be a short-term, mid-term or long-term gain depending on the number of years you have held that property. When you sell your capital asset, the difference between the selling price and cost basis is your gain on which the IRS is eager to tax. This gain may differ from one investment to another, depending on the type of investment, any changes made, depreciation taken during the course and certain other factors.