Custom Search





Home
Site Map: START HERE
Rental Property Intro
Investment Strategy
Property Values 101
Find a Property
Financing Property
Cash Flow Analysis
Landlord 101
FREE Landlord Forms
Landlord Insurance
Tenant/Property Law
Rental Property Tax
Foreclosure Property
Commercial Property
Retirement Savings
Sell Property
Property Definitions
Rental Property Blog
Property News
Real Estate Videos
About

Follow Me!
Bookmark and Share

"Overview of Capital Gains Tax on Investment Property"


Show Your Love



Whenever you sell for a profit, you will incur a capital gains tax, which could very well be one of your largest property costs. Just like with stocks, commodities, businesses, or any other investment vehicle, any and all capital gains on investment property sales are taxable.

On the flip side, selling for a loss would act as one of your rental deductions, but as long as you have a long term investment horizon, the chances you'll experience a loss when you sell are slim to none.

Disclaimer: Please note that I am no tax expert. There are many adjustments, rules, exceptions and special cases in the code pertaining to capital gains taxes, so please make sure you leverage the expertise of your accountant.


SHORT VS. LONG TERM CAPITAL GAINS TAX


Assuming you are holding your multi family properties in a single-member real estate LLC, your capital gains liability will depend on how long you owned each property that you sell.

The tax rate will be lower on "long-term capital gains," which are gains on assets that you hold for at least 1 year. This rate is currently 15% (5% for low income folks). The 15% rate is set to "expire" in 2010 and is expected to increase to 20% or more soon thereafter (boo!).

Short-term capital gains on investment property sales are taxed at a much higher rate called the "ordinary rate." The specific short-term capital gains tax rate depends on your personal tax bracket and could be as high as 35%.


CALCULATING YOUR CAPITAL GAINS TAX


Here are the steps to determine your capital gains tax:

  • Determine your adjusted basis
  • Subtract your adjusted basis from your sell price (gross profit)
  • Multiply gross profit by the appropriate capital gains tax rate (either 15% or the ordinary rate)

You must first determine the taxable amount (i.e., the amount of your gain). The taxable amount is the difference between your sell price and your adjusted basis.

Your original basis is the amount you paid when you purchased the property. From this, you will have to figure out your adjusted basis, which is the result of increasing or decreasing your original basis by doing certain things.

The following are items that increase your basis (add these costs to your original purchase price):

  • The cost of improvements having a useful life of more than a year
  • Assessments for local improvements
  • Sales tax that is not deducted
  • The cost of extending utility lines to the property
  • Legal fees such as the cost of defending title
  • Zoning costs

The following are items that will decrease your basis (subtract these costs from your original purchase price):

  • Property depreciation deductions
  • Nontaxable corporate distributions
  • Insurance reimbursements for casualty and theft losses
  • Easements
  • Rebates from the manufacturer or seller

Of course, you'll want to increase your basis as much as legally possible in order to minimize your capital gains tax investment property expense.





OPTIONS TO DEFER CAPITAL GAINS TAX


The IRS allows you to defer capital gains taxes with certain tax planning strategies. I don't really worry about these things too much and so this topic is beyond the scope of this site.

But if you wanted to do your own independent research, here are the deferment strategies to investigate:

  • 1031 exchange
  • Structured sale
  • Charitable trust (CRT)
  • Private annuity trust


BOTTOM LINE


Of course no one wants to be taxed for capital gains on investment property sales, but hey, it's better than selling for a loss!

The bottom line is that absent of flat out deferment, you'll want to minimize your capital gains tax investment property liability by holding each property for more than 1 year and maximizing your adjusted basis.



Return to Selling Rental Property


Return from Capital Gains Tax Investment Property to Homepage



4 Responses to Overview of Capital Gains Tax on Investment Property

  1. Jonsey says:

    Thanks, nice overview on capital gains taxes! I’m a “mid-tier” investor and I’ve sold probably dozens of homes over the past 10 years. I can tell you from first hand experience that it’s easy to forget about the capital gains taxes. Be careful not to do this, because if you do foreget you’ll really get burned at tax time. And even though the long term capital gains tax rate is 15%, it still adds up to a ton of cash whenever you sell. So just make sure you factor this into the selling equation I guess is what I’m trying to say here…

  2. Bird Doggie says:

    Good info here!! My 2 cents…I learned the hard way that capital gains tax should be accounted for from the get-go, sort of like a reserve account. My strategy is to buy and sell periodically, and as such I allocate a portion of my monthly reserve to fund a capital gains tax fund. This way, you won’t get burned by a 5-figure tax bill!

  3. Jose Garcia says:

    Does anybody know the capital gains tax specs for Mexico? I am from there and my family is looking to sell the house and move to the states. So, just wondering. I will also ask my accountant but he is in the US so I’m not sure he would know. Thanks in advance!

    Jose

  4. Angst says:

    Huh, leave it to the government to tax everything possible. Capital gains tax is yet another example of the decline of the “American Dream”!

Leave a Reply

Your email address will not be published. Required fields are marked *

Name *
Email *
Website
Comment

footer for rental property investing page