The tax code and rules in the United States are complex and diverse in many fields. Real estate tax rules and policies may depend on the area and nature of the property. Homeowners and property investors must have adequate knowledge of real estate taxes and audit procedures in America before they attempt to buy and sell their properties.
Capital Gains Tax Overview
When you sell an asset for more money than you paid while buying, it is called a profit, this profit is also called a capital gain. For instance, if you buy a share of stock for $50 and sell it for $75, then the profit of $25 is termed as a capital gain.
These profits are taxable income; however, all capital gains are not treated similarly in taxation. Capital gains are classified into two segments; long-term and short-term. When you sell a property or asset that has been under your ownership for one year or less, the profit is considered as short-term capital gain. In comparison, long-term capital gain refers to a profit sale from an asset you have owned for more than a year. The tax code in the U.S. encourages long-term capital gains that are taxed at low rates.
Real estate owners should realize that property taxation is based on cost. If you are buying a property space for $100,000 and selling it for a price of $ 140,000. the capital gain will be counted after deducting all the expenses involved with the sale. A property costing you $100.000 and expenses such as $5000 acquisition fees will be taken into account. After some years, when you sell the same property for 140, 000 and you pay $6000 in various sale costs, your capital gain will be $29,000 profit for tax purposes.
Tax Exclusion on Primary Residence Sale
You can get a capital gain tax exclusion benefit on the sale of your primary residence. This helps home sellers to exclude almost $250,000 capital gain profit from their primary home sale. This tax exclusion is not applicable for a vacation home or an investment real estate space.
Investment Property Sale
The primary residence sale tax exclusion rule does not apply to real estate investment property sales. You can encounter complex and boggling tax situations when you sell your investment property. There are two kinds of taxes that you need to look into and pay after selling an investment property. They are capital gain tax and depreciation recapture tax.
Depreciation Recapture Taxation
You can deduct the depreciation rate of your investment property every year, and it is considered to be one of the best tax benefits for property investors. Depreciation of assets can happen slowly and over some time. For instance, if you purchase a business asset for $10,000 with a lifespan of three years, you could minus or deduct one-fifth of its buying price cost each year for a total of three years.
U.S. taxation rules are strict, an income irs tax audit is mandatory for all individuals and businesspeople, and all have to abide by their respective state tax authority rules.
