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Have Some Real Estate Investment? Learn What Could Happen to Your Capital Gains
Who doesn’t have some investment in real estate? This is basically where many interested investors flood their cash. A safe investment? It depends on your risk profile and investment portfolio. A seasoned investor might have some diversification in real estate which constitutes different asset classes all with a different appeal and risk level. Regardless of the real estate investment you make, once you sell it, you make a return called capital gains. The term isn’t unique to real estate; it is a general term associated with basically all investments. It is the difference between the buying and selling price (which is higher). A more familiar term is profit, but for investment purposes, it is termed as capital gains. With capital gains, comes the aspect of tax. However, not all investment’s capital gains are calculated equally. The procedure for arriving at the capital gains tax is different from bonds or other securities like stock. Of course, in rare cases, you might incur a capital loss which is treated differently for tax purposes.
How to Calculate Capital Gain
In real estate, the capital gain is based upon its adjusted cost and not what you paid for when you bought it. You are going to consider the purchase price when arriving at the capital gains for real estate that isn’t the price you paid at closing but the purchase price. On top of this, you are going to include all adjustments that include all the additional transfer fees on the cost of purchase, cost of sale as well as the cost of improvements. So for you to get to the capital gains tax, you subtract your home’s adjusted cost basis from the selling amount. Of course, there are certain exemptions for capital gains that you need to enlighten yourself on so that you can take advantage of all capital gain tax cuts on real estate.
When is Capital Gain Realized?
Since a capital gain is a rise in the value of an investment, the value isn’t realized until the asset gets sold, either in the short or long-term. In both these situations, there’s a tax claim. The moment an asset is sold and capital gain is realized, it triggers a tax event. There are also unrealized capital gains or losses, which mean a rise or loss in value, but hasn’t triggered a taxable event.
Long-Term Versus Short-Term Capital Gains
If you hold your property for more than one year, it qualifies to become a long-term investment. However, if it is for a shorter period of less than a year, it is a short-term investment. Of course, the tax treatment in both cases for the capital gains realized will be different since short-term investment gains are taxed differently from long-term investment gains. The tax implications might be significant, so it is wise that you wait till you pass that one year mark before you can sell your real estate investment.
How Can You Save on Your Capital Gains?
Well, real estate is one of the best tax breaks that most people can access easily. If you are not married, you can make up to $250,000. On the other hand, if you are married, you are guaranteed $500,000 before you are subject to any tax on your capital gains on real estate investment property. When you pass this threshold, you are going to be taxed at the rate of 20% for any additional gain that you make from this investment. However, for you to gain from such capital gain tax cuts on real estate, you should meet all conditions. It needs to be your principal residence which you should have lived in for at least two years. If it is a vacation home, it doesn’t count. If you get married, you get to enjoy both benefits.
Don’t Forget About Your Capital Losses
Remember that real estate values can also depreciate. What this means is that you have undergone a capital loss. There are times that you might possess more capital losses than you do capital gains which you can offset from your capital gains. This means that you are going to pay taxes only on the difference between your capital losses and gains — quite a remarkable saving on tax.
No matter where you stand, whether you possess long or short-term real estate investments, you need to comprehend how capital gain works so that you can limit your tax burden. Otherwise, you might end up incurring a high taxable amount that you could have avoided.
