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Real Estate Investment Basics: Capital Gains Tax
One of the big concerns of real estate investors is called Capital Gains Tax.
When a property is purchased, the cost of the property plus expenses are called the 'basis' cost of the property.
During the period of ownership, the basis can be adjusted up based on expenses incurred, like home improvements, or down due to claiming depreciation on income tax. This adjustment is called the adjusted basis.
Upon the subsequent sale of the property, if the net gain on the property exceeds the adjusted basis, Capital Gains taxes may be required on that gain amount, and can be handled in various ways. Portions of the gain can be excluded from capital gains tax. A person's main residence may not require payment of capital gains taxes The most central issue is whether or not the property was owned for the short term (1 year or less), or the long term (over 1 year).
Short term capital gains are normally taxed at the normal income tax rate based upon your tax bracket, which is a higher amount than what is required for long term capital gains. Long term capital gains are taxed at a rate between 8% and 20%.
This page is meant to introduce the topic of capital gains taxes only, because people always ask about it. For a complete understanding, visit the IRS website and read instructions for Schedule D, Capital Gains and Losses,
or consult a financial planner, tax advisor or CPA.
*** rates valid in 2014
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