What is a Capital Gains Tax?

Capital gains tax is imposed on capital gains, that is the profit incurred while selling a non-inventory asset when it is higher than the amount gained on the sale. Capital gains taxes are commonly realized in the sale of stocks, bonds, precious metals, and property.

How do capital gains tax work on rental property

Rental properties have advantages, as they can serve as a regular income source, which can be quite profitable. When it’s time to sell the property, these properties can cause a huge issue. You need to pay the taxes on the capital gains acquired from the rental property. This tax could be a considerable amount depending upon the profit gained from the sale, but you can try to reduce it by using a few techniques here and there.

How to save money on Capital gains tax?

The best way to reduce your tax on the sale of your rental property is by pairing the profit acquired from the deal with a loss in any other investment. This way, you can balance up your financial charts and redeem your taxes.  This strategy is known as tax-loss harvesting.

If you are a regular real estate investor, then you can avoid paying the capital gains tax taxes. It is possible if you do not want to cash out, us the Section 1031 of the tax code. It gives you the power to sell off one rental property and then purchase a property alike, and exempts you from paying the taxes. But this works until you do not cash in a profit, as soon as you gain real cash, the fee would be liable. But this exchange is only limited to real estate.  Hence, swapping one property for others is the simplest way to defer taxes.

Another strategy called the deferred exchange can help you sell a property and acquire a similar kind of property, but this strategy has its catch. The property must be for rental purposes and must have generated income; you cannot use any residential or any other property for this strategy.

Saving taxes is not that of an easy task. But you can maybe turn your rental property to your residence. It would earn you more tax benefits and save you the big hit, rather than trying to manage the capital gains on rent. Though the benefits come with its conditions, as long as you can fulfill them, you can save your taxes well.

In conclusion, it’s no hidden fact that Capital gain taxes aim to take away a considerable amount from your profits on the sale of a property. You need to keep some tricks in mind to get away with them. These strategies mentioned above will help you, either exchange one property for another, pair up your profits and losses together, or convert your property. All these strategies need careful implementation and proper planning of assets. While you may not avoid the taxes altogether, it does reduce the burdens, without the plan you easily give on 15-20% profit depending on how much income is generated.

About Jennifer Cribsly

I'm a former real estate broker who specialized in helping first time buyers be able to purchase a home. Now full time mom, part time real estate owner/investor.
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