Real Estate Taxation - Long Term v. Short Term Capital Gains

Almost everything you own and use for personal or investment purposes is a capital asset. When you sell a capital asset, the difference between the adjusted basis in the asset and the amount you realized from the sale is a capital gain or a capital loss. Capital gains income gets taxed at much lower rates (the highest is 20%) than other kinds of income.

But what does any of this have to do with real estate investing?

Two words: a lot

Two words: tax rate

Two words: capital gains

The IRS does not provide a standardized capital gains tax rate that applies to all and there are several factors that go into which rate applies to your situation. The first step to determine your capital gains tax rate is to determine whether you have a short- or long- term capital gain. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. For tax purposes, these dates are calculated from the day after the original purchase to the date of sale of the property.

The next step is to determine your gross income from the previous year and your filing status to properly determine your tax bracket and the applicable rate.

Short-Term Capital Gains Tax Rate

If you have made the determination that short-term capital gains tax applies in your situation, the profit on the sale of your capital asset will be taxed at the regular income tax rate.

Long-Term Capital Gains Tax Rate

The long-term capital gains tax rates are lower than the corresponding tax rates for standard income. You may not need to pay the tax at all if you make less than the minimum amount listed below.

Your capital gains tax rate will depend on your filing status and how much money you made last year.

Tips for Investors Selling Real Estate

Short-term capital gains being taxed at an individual’s regular income tax rate can present a major problem for short-term buyers like house flippers.

For example, assume you earn a profit of $30,000 from flipping a home within 1 year. Also, assume you earn an annual salary of $80,000 from your regular job. Under these circumstances, when you file your federal taxes, the IRS would consider your gross income for that year to be $110,000 and consequently, you will be subject to the same tax rate as an executive that earns $110,000 at your company.

You can minimize your tax burdens with short-term sales by carefully accounting for all of your expenses and deductions.

Also, you can deduct any repairs or renovations you made to an investment property to improve the final selling price of the home. Remember to keep all relevant documentation such as bills, deeds of sale, credit card statements and other similar papers if you’re audited.