The real estate market is one of the most profitable and smartest choices of a business all around the world, especially in parts of the world where lands and properties are more in demand. It’s all about waiting for the right moment to buy a property at a reasonable price and then, selling it at a cost which could give your pockets a good doze of fresh money.
Earning Capital Gains with Real Estate:
It’s not going to be easy making money in real estate, especially with all the investors spending cash generously and making a killer profit in return. The best thing about the real estate business is that one does not even require a hefty bank account to take their first step. In fact, one doesn’t even need to be a professional real estate agent to make this kind of money. You can sell your own property at a good price after living in it. Any kind of profit from real estate transactions is your gain, or if you are looking for something more, then you can buy a property, rent it out and then sell it. So, every moment that the property has been in your ownership, it has been earning you money.
In fact, a property like an apartment building can even earn you more than it ever cost you in the first place. Renting out apartments to different families get you better income than collecting rent from just one.
Another way of making money with real estate is buying property and then renting it for a short term period, most probably as a vacation or a summer house. This one is even more profitable but a little difficult to manage, with such a quick succession of tenants. Regardless, this method too is lucrative and earns a good profit to the real estate investors.
While rent is a good source of earning income with real estate and it is also considered as capital gain, there is another more obvious and quick source of large income with real estate properties, and that is through selling them. This way, investors instantly get their spent cash back but this time, it comes with a sweet amount of gain. And just like tax on rental income, the owners are also bound by law to pay Real Estate Capital Gains Tax.
Real Estate Properties Used for Earning Money:
It’s not only just a single house or an apartment building that could earn you real estate capital gain. In fact, there are many properties that are counted under real estate and will help you get the profit you were aiming for. The following are some of them:
- Duplexes, triplexes or quads are buildings that can house several families at once. They mostly consist of 3-4 units and serve several purposes. For instance, the owner cannot only earn income with it, but can also live in it and save themselves the trouble of blocking cash on their own living accommodations.
- Raw, plain land with nothing but green grass on them also holds good value. They are especially in demand by constructors; either way, you can earn your cash when you feel like it since property rates are always increasing.
- Mobile homes are an excellent investment for the real estate newbie. They can learn about investment, cash flow and gains without risking too much.
- Investing on commercials spaces could be one of the smartest decisions a real estate agent can make. These can be rented out at a good price and commercial spaces have a tendency to appreciate in land as well as rental value over time, especially if the business is prospering there. Regardless, it can land a good profit.
- Industrial properties used for manufacturing and production purposes are also used for real estate capital gains.
- Other prosperities used for gaining profit include motels, RV parks and farming lands.
Owning all of these properties means that we gain profits through them, making it necessary to pay Real Estate Capital Gains Tax on them. But first, let’s understand what Real Estate Capital Gains Tax is and what the rules that apply in such cases are.
Understanding Capital Gains Tax:
When anyone has gained a profit from their assets, sales, investments, stocks or a property, they have to pay a tax. This tax is called capital gains tax, more commonly referred to as CGT. In order to determine a Real Estate Capital Gains Tax, the seller will have to deduct their selling price from the price at which they have purchased the stock or a property. Once the owners of a real estate property have figured out the profit they have earned after selling the property, they’ll have to pay the Real Estate Capital Gains Tax.
However, there is some leeway given to property owners in certain situations. In fact, in some of the most suitable situations, the homeowners can even sell their property, get a good profit, and won’t be liable to pay a single penny to the government, or more accurately, to the IRS (Internal Revenue Service). You are already at an advantage with the property tax deductions and the mortgage interest, but many owners can get some major amount on the entire amount of Real Estate Capital Gains Tax waived off if they have sold their own primary dwelling in which they have been living for 2-5 years. The amount of tax exclusion is $250,000 for a single owner and for married couples, it is $500,000. Great right? This is not the only advantageous situations. There are various other ways, completely legal, in which homeowners can save themselves from Real Estate Capital Gains Tax.
What the Authorities Have to Say About this Real Estate Capital Gain Tax?
By authorities, we mean the revenue service department of the United States federal government, or as famously known, the IRS (Internal Revenue Service). While the implementations of taxes are regulated by the IRS, it personally has little to do with Real Estate Capital Gains Tax or more accurately, it is not directly responsible for receiving or dealing with it. This responsibility falls on the shoulders of the local municipalities of all the different counties of United States of America.
Real Estate Capital Gains Tax and its rates are neither the same for all the different parts of the United States of America nor is the methodology of assessment the same. For instance, in the state of New York, the municipalities have set a system of classification for assessing the property type and value of the property, and they do so by categorizing it into 4 classes. As of now, the highest rate of capital gain tax is highest in the states of California, New York, Minnesota and Oregon. All of these states have a Real Estate Capital Gains Tax of above 30%.
On the contrary, the States with the lowest rate of capital gain tax include New Hampshire, South Dakota, Nevada, Texas, Washington, Tennessee and Wyoming, Alaska. Without any personal income tax, these states charge capital gain tax at a rate of 25%.
Ways to Avoid Real Estate Capital Gain Tax without Being Illegal:
As long as you are alive and are standing on your two feet and making money, you owe it to your country and state to pay the taxes. We are not just referring to income taxes and the tax we have to pay on our payrolls. Those individual who are making money from the profit they earn from buying and selling their stocks and their properties need to pay their share of Real Estate Capital Gains Tax. Depending on the state the profit earning individual is living in, they’ll have to pay the tax according to the rates assigned to them by their municipal managements.
Mostly, the rates of this Real Estate Capital Gains Tax ranges between 25-35%, depending on the profit you have earned. The good news is that there is some leeway for us and there are various options for us to reduce these taxes to the minimum using a completely permissible and authorized system. As they say, knowledge is power, we are going to impart some valuable information for you so that you can use any of these opportunities to reduce your tax to the minimum.
Read on and pay attention as maybe, you’ll find a way to save your thousands of dollars with the help of these following smart hacks:
1. Primary Residence Exclusion:
If a person buys a property, makes it their primary dwelling and then sells it, there’s a high chance that they can save almost $250,000 from their Real Estate Capital Gains Tax. If they are lucky and are married to someone, the rate of exclusion might be doubled, and they can sell their property with almost no or the most minimal tax payment.
2. Buy and Hold:
You don’t have to sell your house the moment you buy it. Waiting a year can work in your favor; in fact, this act alone can help save at least 10-20% on your tax payment. How is that possible, you might wonder? Conversely, there are 2 kinds of capital gain tax, one which must be in the short term and the other is in the long term. Luckily for us, the one in the long term has a lower rate. So naturally, any smart person would look at this as an opportunity and make a habit of buying properties, holding it for at least a year and then selling it, hence gaining their regular expectation of profit and then paying less tax for it. Genius, right?
3. Renovate a Home:
You need to be astute when you are dealing with such a thing as real estate investments. We discussed earlier that selling your house as your primary dwelling gives you a certain margin of tax exclusion. What super smart real estate agents do is that they buy a property which is not in the best condition but has hope. They buy these properties as their primary residence and begin to get it renovated. So, when they sell it, they sell it at a higher price because of the fresh renovation yet make full use of the primary residence exclusion deal. However, you might want to make sure that such kind of activity is not frowned upon in the state where the property is located by contacting the relevant authorities.
4. When the Income Stems, Sell Your Property:
Acceptably, there is nothing good about having a low income. But in this situation, it can actually be a good thing for you. The long-term Real Estate Capital Gains Tax is directly proportional to the level of your income. So the lower your income is, the lesser rate you will be paying for your Real Estate Capital Gains Tax. In some cases where the income is almost diminishing or about to end, you wouldn’t need to pay the tax at all. So, if you have a property lying around and you are just entering in your retirement period, or you have been laid off, or leaving the job, just any excuse would do. Make sure you sell your property when your income is at its lowest. And if by any chance that doesn’t happen and your income remains high, hand over your property to a family member who is living in a lower income bracket.
5. Make a Note of All Your Capital Losses:
The chances of this happening are slim to none but if you have happened to beat the odds and somehow, have been able to sell your property at a loss at some point in the year, your other property gains can benefit from it largely. The Real Estate Capital Gains Tax is reduced if the homeowner has incurred some capital loss in the same year. Use this to your advantage.
So, you can use your year’s worth of capital losses and use it to reduce the tax on your capital gain.
5. Property for Property:
You don’t have to pay Real Estate Capital Gains Tax when you are not cashing out your investments but instead, are trading one for another. If one property is exchanged with another, none of the homeowners will be liable to pay the tax. Better yet, this is completely legal; in fact, it is even mentioned under the 1031 exchange that if one real estate is exchanged with another, no one would be asking for tax unless the newly acquired property is sold. So, in case you are in search of a new house but don’t want to deal with taxes amidst it all, you can find a new property and offer yours to another investor.
However, this deal might be a little tricky since this exchange asks for no involvement of cash whatsoever. This means that both the properties must be alike, having the exact same market value. Since none of the investors would like to end up on the wrong side of the deal, they manage to add some cash to equal out the prospects, which is all great, but won’t allow exchange 1031 to remain in effect.
6. Stay Mobile:
Remember how making a house your primary dwelling helps you exclude several dollars on Real Estate Capital Gains Tax? Well, that privilege can be threatened when you have been living in the same house for years and years, have no spouse, and the place where your house stands is one of the most preferred neighborhoods in town. Then, you might be on the verge of outstaying your welcome and losing your chance of tax saving when it comes to capital gain exclusion.
There’s a solution though. The exclusion policy claims that the homeowner must have lived in the house for 32 -45 years. So before you run out of time, why don’t you change your house as soon as you have reached your 2 years? This will not only help you avoid the tax, but will also help you prosper in your business as you buy and sell various houses between several years and earn good profit without having to pay a single dime as Real Estate Capital Gains Tax.
Real Estate Capital Gains Tax is something that you have to pay every time you earn a capital gain on your stock or upon selling your property. Though we have listed down various options for you to reduce it or ditch it completely based on the rules and rightful laws laid down by the IRS or by a particular state, once you have tried everything and you are still liable to pay your taxes, don’t hesitate and pay what you have to pay according to the tax rates. Remember that this will make your reputation as a real estate agent a good one and will get you in the good books of the municipal authorities and help you grow your business.