When selling your primary residence or a rental property, any income you make on the asset is to be taxed by the IRS. Capital gains tax is the tax you pay on profit you receive from selling an asset. That asset could be a stock investment, vehicle, home, etc.
Essentially, if you own your home for one year or more, the profit from the sale of the home is what is called a “long-term capital gain”. This gain is to be taxed depending on your income bracket, which is usually between 0 to 20 percent.
I’ve had students come to me asking me why I suggest holding properties for more than a year, and capital gains tax is one reason. See, if you sell a rental that you’ve owned less than a year, it’s considered ordinary income that’s taxed and that tax rate is high. This is one reason fix and flip investors struggle with gaining wealth – a whole lot of their gains goes to the IRS.
When you use my Niche2Wealth strategy, you hold onto the property for more than a year, so when you do sell, you pay capital gains tax over ordinary income tax, which is lower. You could also get other tax breaks like depreciation.
Minimizing capital gains tax
When you’re working with taxes, it’s best to have a qualified accountant work the numbers for you, as there are certain things that can be done to minimize capital gains tax.
For example, if you’re single, have owned your home for at least two years as a primary residence, you’ll be able to exclude $250,000 of any gain. That number increases to $500,000 if you’re married.
Track capital improvements
Whether you’re seeking to sell your primary residence or a rental property, always track capital improvements, because improvements can offer you huge tax savings. Essentially, you’ll want to know your adjusted cost basis, which you can get by starting with your base price (cost of the home), then subtracting the adjusted cost basis (capital improvements). Keep in mind that the higher your adjusted cost basis, the lower your capital gains and thus, smaller gains tax.
Offsetting capital gains with losses
If you’re selling a rental property, know that you can offset gains with losses. For example, let’s say you sell a rental property and have a capital gain of $25,000, but you’ve lost $3,000 in the stock market. You can offset that $25,000 gain with that $3,000 loss, avoiding having to pay capital gains tax on that rental property.
Length of time matters
Capital gains tax only applies if you hold your property for more than a year, as stated earlier. If you’ve got a property that you’ve had for less than a year and you sell it, you’re going to have to pay a higher tax percentage. Depending on your income bracket, that increase could be between 10 to 20% more. This is a big reason why I advise holding onto properties for more than a year.
It’s great to understand capital gains tax and this article is to give you a simple overview of what it is. However I advise everyone to have a good accountant (CPA) to either ask specific questions about this or to go to work for you strategizing to keep capital gains tax to a bare minimum. There are tax breaks that are there to work for you, helping you keep your money in your pocket, whether you’re buying and selling short or long-term. The best people to find them are those that work in it everyday, so remember to check with your CPA.