5 Key Takeaways on the Road to Dominating Resources

Saving on Capital Gains Tax after a House Sale

If you’re a real estate investor, you will inevitably build up capital gains tax obligations. This holds especially true in a short-term purchase and sale.

Short-term Sales

If a property is sold earlier than three years after it was bought, short-term capital gains tax applies. And it will be hefty, considering that the gain from this kind of transaction will be included for that year’s taxable income and will be calculated accordingly. It is impossible to exempt the gain from this (short term capital gain is computed by deducting total property expenditures from the sale price).

Long-term Sales

Long-term capital gains tax applies to a property sold three or more years following its initial purchase. Calculating long-term gain is the same process as calculating short-term gain, but the initial investment and overheads involved in the former will both be adjusted for inflation, a process referred to as indexation.

The good news is income from long-term gains may also be eligible for certain tax exemptions. If you’re earning lower than the taxable limit, only the part of the long-terms gains in excess of the limit is going to be taxed. If you sell a property you inherited or one which you received as a gift, taxes are still in order.

Purchasing a Property with Gains

If you buy a residential property using the money you earned from a house sale, the invested amount or the gains, whichever is lower, will be exempt from tax. However, there are limitations to this, considering that the property where this amount is invested has to be bought either a year prior to the first property’s sale, or two years later.

If you build a house from the money you gained, you may also get a tax deduction based on the cost of the land and the building. But the rule states that the construction must be completed no later than three years after the initial sale. If the income is obtained from the sale of land, you will be allowed to claim complete tax deduction, provided the proceeds were all spent on building a residential property. But you must ensure that you own only one house prior to investing in the new property.

As you can see, there are many opportunities for you to save on capital gains taxes. The key is to make sure that you know and understand how these opportunities can work to your advantage. These days, there is no excuse for misinformation. There is so much to know on the Internet, and as long as you pick the right websites, you will surely learn a lot. Of course, it’s still best to speak to a real estate lawyer to avoid misinterpreting tax laws and regulations.