Many people talk about capital gains tax when making an investment in real estate or any type of investment. Capital gains are really important stuff to talk. At glance, it is related closely with the profit you got from this type of investment.
You can enjoy the tax benefits as long as you own the asset, but you will have to deal with the tax calculation when you sell it. How does it work? And how much should you pay for the rate? Read the following articles to talk more about this.
Understanding Capital Gains Tax Concept
Capital gains refer to the profits you get when you sell taxable asset whose value increases while owning it, such as real estate or stocks. The tax applied to the sale is called capital gains tax. The rate would be based on the profit you are getting (the price of sales minus the price of purchase) and the length of time you are holding on to the asset.
There are basically two types of capital gains tax: the long term one and the short term type. The long term tax rate applies to assets that are owned for more than a year. It also depends on your (taxable) income. The short term one, on the other hand, applies on assets that you have within a year (or even less). It has higher rates and it depends on your own income tax bracket.
You are only responsible for paying the capital gains tax when you sell the assets. During the time of your ownership, you aren’t required to pay for the tax. When you finally sell the assets, it’s called ‘realized’ – whether you are making profits or loss.
Based on the 2021 capital gains tax, there are several arrangements and categories on how you should deal with the tax rate.
- The capital gains tax rate would be 0% for single people having up to $40,400 of income, for married couples (filing separately) having up to $40,400 of income, for head of household having up to $54,100 of income, or for married couples (filing jointly) having up to $80,800 of income.
- The capital gains tax rate would be 15% for single people having from $40,401 to $445,850 of income, for married couples (filing separately) having from $40,401 to $250,800 of income, for head of household having from $54,101 to $473,750 of income, or for married couples (filing jointly) having from $80,801 to around $501,600 of income.
- The capital gains tax rate would be 20% for single people having from $445,851 and higher, for married couples (filing separately) having from $250,801 and higher, for head of household having from $473,751 and higher, or for married couples (filing jointly) having from $501,601 and higher.
Naturally, there are some certain exceptions to this condition, such as:
- Net capital gains (from collectible sales, like art or coins) would be taxed at around 28% max rate
- Taxable portions of certain (small) business stocks sale would be taxed at around 28% max rate
- Certain capital gains portions (from certain or specific sales of the real estate) would be taxed at around 25% max rate.
Ways to Reduce the Bill
If you want to reduce the bill for your capital gains tax, there are some possible ways to do so. No need to worry; they are completely legal and legit.
- Claim the losses. You are able to deduct $3,000 within (investment) losses from the investment profits on a yearly basis. If you purchase an investment that actually causes you to lose money, then you can sell it before the year ends to cut off the tax bill.
- Never buy the losing investment back. In the event you sell a losing investment (so you can benefit from the tax deduction), don’t immediately buy it again immediately. If you do such a thing in the range of 30 days from the selling, IRS may penalize you.
- Benefit from retirement. If you have profitable investments, wait until your retirement day to finally sell them. If you have lower income (which is common during retirement), you can enjoy lower tax rate. If the rate is pretty low, you may not have to pay the tax bill at all.
- Invest within a retirement plan. When you invest money in IRA (Individual Retirement Account) or 401(k) (or other similar plan), you should know that they aren’t subject to the tax bill after the retirement time.
Real estate investors should know that they can actually enjoy tax benefits, such as depreciation or capital gains tax, but only if they do it right, so be sure to plan ahead with the professional tax advisor or expert.