A Quick Overlook of Exchanges – Your Cheatsheet

Ways to Save on Capital Gains Tax Following a House Sale

If you’re using real estate investments to generate income, you will naturally accumulate capital gains taxes. 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’s going to be hefty, with the gain from this type of transaction being counted as part of the taxable income for that particular year and will be computed accordingly. This gain – determined by deducting total property expenditures from the sale price – can never be exempt from tax.

Long-term Sales

A property sold after the third year of its initial purchase will be subject to long-term capital gains tax. The formula for calculating short-term gain is the same as that used to calculate long-term gain, except that both the initial investment and overheads of the latter are 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 earn less than the taxable limit, only the portion of the long-term gains that exceeds the limit will be taxed. If you sell an inheritance property or a property that was given to you as a gift, you still have to pay taxes.

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 invest the proceeds in constructing a house, you are also entitled to a tax deduction based on the costs of both 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 earned from a land sale, complete tax deduction is possible as long as the gains all went into building a residential property. But you have to make sure that you don’t own more than one house before you begin investing in the new property.

As you have read, there are plenty of opportunities for you to limit the amount you pay on capital gains taxes. The key is to have a good grasp of how these opportunities can be used to your full 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, to avoid misinterpreting tax laws or rules and regulations, it’s best to speak to a real estate lawyer.

Source: http://www.passiveincometoretire.com/maximise-property-investment-income/