Are Capital Gains Taxes Eat Away at Your Profits? Four Effective Solutions for Substantial Savings on an Investment Property

Profits realized when selling an investment property are subject to income taxes by the IRS as income. If your purchase was $400k and sale for $600k, your gain would amount to $200,000. That sum would need to be reported as income for taxation purposes.

As with your primary residence, capital gains on investment properties are not excluded from taxation; all profits are taxed at an applicable tax rate that varies with how long the property has been held for; short-term gains will be taxed at your regular income tax rate while longer-term (0% to 20%) rates could apply if held more than 12 months.

Capital gains tax can be minimized or avoided entirely with four strategies.

1031 Exchange

One way of deferring capital gains taxes when selling real estate is investing in another similar property and delaying payment until later on.

Gains can be offset with losses by trading off gains with losses.

Tax-loss harvesting is a strategy for lowering your tax bill by using capital losses to offset any gains.

Keep Your Property for Extended Years

Cling onto your property as long as possible to take advantage of lower capital gains tax rates for long-term assets, which can translate to significant savings when compared with short-term gains rates.

Depreciation Recapture

Any depreciation claimed in the past should be "recaptured", and taxed as ordinary income. Take advantage of all deductions available while owning the property to minimize costs.

Understanding capital gains tax when selling an investment property can save you thousands. Please feel free to reach out with any inquiries about this subject; I am more than happy to assist!