The vast majority of us hate paying taxes, and because of that we always try to find a way to reduce our overall tax bill. That being said, there are a few things which many believe come with an inevitable tax bill that they’re going to wince at. One of the biggest of these is the real estate capital gains tax. While selling property can be extremely profitable, it also comes with the drawback of having a comparatively high tax bill once everything’s been said and done.
Having said that, though, there are ways that you can legally reduce your capital gains tax rate should you know how to go about it. That’s because the tax rate can vary between 0% and 20%, depending on the value of the assets that you’re selling and a few other factors. With that in mind, there are a few ways to ensure that you’re not paying too much capital gains tax on real estate.
Wait Until Your Income Is Lower
Not many people might be aware that the rate your capital gains tax is set at is directly tied to your marginal tax rate. Someone with a marginal tax rate of either 10% or 15% won’t have to pay a capital gains tax, while 25%, 28%, 33%, or 35% pay a capital gains tax of 15%. Those in the 39.6% marginal tax rate bracket will end up paying 20% capital gains tax.
If you’ve bought a property and sell it for a profit, then you may want to wait until your yearly earnings are relatively low compared to other years. This could end up saving you thousands when you do eventually sell the property. You may end up falling into one tax bracket one year but be in another, lower bracket another year, which means that you’ll have less overall taxes to consider when you’re selling the property.
This is perfect for the likes of people who are looking to retire relatively soon; you could purchase the property while you’re still working and wait until you’re one or two years into your retirement before selling. Not only would it make a great nest egg, but you’ll be saving that little bit extra when you do so.
Own The Property More Than A Year
This won’t affect you if you have lived in your house for a few years. It will be a major factor if you buy and sell houses or property for a living. This is because after you’ve owned the property for a year, it can qualify as a long-term asset; something that’s considered a long-term asset will qualify for a lower capital gains tax rate. Since it’s also tied to your marginal tax rate, you could effectively reduce your capital gains tax rate to near zero.
For example, if you’re taxed at a marginal rate of 10% or 15%, you’ll have a capital gains tax rate of 0% as we mentioned above. This will naturally increase the more you’re marginal tax rate is up to 20% if you fall into the 33% marginal tax bracket. This can also be used for other types of assets, so you’ll be able to use it for the likes of stocks and any other investments that you might make.
Keep Records Of House Improvements
The cost of home improvements can go a long way in terms of how much you can get for your property, but they can also have an effect on the tax bill that you’ll pay when you sell it; however, this doesn’t have to be as negative as you think. You can use the cost of these improvements to offset much of the capital gains tax; this will end up letting you pay an overall smaller capital gains tax.
However, in order to reduce your capital gains tax this way you’ll have to keep detailed records of any home improvements that you’ve had in the house. The IRS has said that anything that betters your home in any way, or even restores it to a previous condition, such as repairs, count as a home improvement. Because of that, keeping detailed records about everything that you’ve had done to your house is highly recommended.
With those strategies, you’ll end up paying noticeably less capital gains tax when it comes to your real estate. What’s stopping you from saving on your taxes?