Understanding Capital Gains Tax and How to Take Advantage of It in Real Estate
Understanding the basic concepts of taxation is essential especially during this time when there are new tax reforms that would affect many people. Many people feel the pinch of paying taxes because it cuts down the gains that they many in business or employment but do you know that you can take advantage of tax policies to save lots of money? In particular, investors in real estate should be concerned with how a capital gain tax could affect them. 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. In many circumstances, property owners make profits when they sell the property. This benefit is a capital gain, and it is taxable at a rate which is predetermined. There are two types of benefits when you sell a property; short-term gain and long-term gain and they have different rates of taxation. 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. In case you have sold a property that you have stayed in for a couple of years after acquiring it less than five years ago, you can exclude $250,000 from the amount that qualifies for capital gain tax. If you have a spouse, then the amount to exclude doubles to $500,000.
How do you qualify to pay capital gain tax? Usually, short-term capital gains owner pay more than long-term capital gain owners. 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. The use of taxation tools such as capital gains tax property exemption tool can help you to determine whether you qualify for capital gains tax or not.
How can you control the amount of money that you pay for capital gain tax? Since long-term gains have favorable tax rates, you can delay the sale of properties that you have held for less than a year until one year elapses. 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. You can do this by waiting to sell your property after retirement or transferring a massive chunk of your income to retirement savings.