Selling a home? It can be an interesting process, but you have to be aware that your capital gains on real estate are taxable and the IRS (Internal Revenue Service) will remind you of that. Here’s how to reduce capital gains tax on a property:
Besides property, income and sales tax, there is a tax when you sell investment assets. It doesn’t only apply when you sell a home, capital gains tax is required when vehicles; jewelry or other collectibles are sold. Did you know that they can be as high as 38% or as low as 1%? The first step is to know that there are some strategies to help you understand how this type of taxes works.
Another way to know how to reduce capital gains tax on a property is been patient. You can qualify for the lower capital gains tax rate if the asset is in a long-term status; that is to say, holding the asset longer than one year. In fact, you could lower your tax by more than half depending on the marginal rates which can range from 15% to 39%. For instance, $5,000 capital gain can result in a tax of $750 compared to a short-term status tax of $1,650.
It is recommended to live in the home for at least 2 years before you sell it. It’s a good way to get around the capital gains tax; there some exemptions for investment property. However, it is mainly by trading retail space for another similar space. This is known as like-kind exchange properties (1031 exchange).
We also recommend you: Important Steps in the Home Selling Process
One way to avoid capital gains tax is to keep the receipts of all the improvements you’ve made. For instance, expansions, landscaping, driveways and remodels can help you cut your capital gains tax.
Do you want more tips about how to reduce capital gains tax on a property? Well, please keep reading!
If the home you want to sell isn’t your principal residence, you may want to cover your mortgage by renting it. Moreover, it can a great option since you can be exempted from the capital gains tax as long as you limit how long you will rent it. Remember that if it is longer than three years; it will be considered an investment property which increases your chances of being exempted.
The IRS allows excluding to $250,000 the profit when calculating capital gains tax which can increase to $500,000; if you are married or filing jointly. Nevertheless, you won’t be exempted if you already claimed the $250,000 or $500,000 exclusion in a two-year period. It also applies to those who bought the property through a like-kind exchange in the past five years.
If you donate to a nonprofit organization, you’ll always get a tax deduction; that means lower capital gains taxes! Try donating an asset and remember to claim tax deductions for its current market value.
We hope this article could help you to know how to reduce capital gains tax on
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