How to File Taxes as a Real Estate Agent

Capital Gains Tax for Real Estate and Stock Investors Explained

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If you are involved in the buying or selling of financial assets, you may be subject to capital gains tax. In addition, when selling real estate, you will have to take capital gains tax into consideration in order to comply with all IRS regulations.

The capital gains tax is a tax assessed broadly on the profits from financial asset transactions. For example, if you buy stocks and then sell them after a year for a higher price, the profit is subject to capital gains tax. Other examples of assets subject to capital gains tax include:

• Treasury bonds
• Corporate bonds
• ETFs and tradable instruments
• Dividends from investments
• Commercial and residential real estate

An important aspect of paying capital gains is the assessment of the tax. The tax only becomes due when the holder of the asset sells it and realizes a gain. In case the holder decides to hold the asset for a long time, say, five years or more, no capital gains taxes will be due for that period. Even if the asset appreciates in the intervening years, the tax only becomes payable when the asset is sold. This makes it possible for investors to take advantage of deferred tax strategies with regard to capital gains.

Capital Gains Tax on Stocks

The capital gains tax rate for stocks varies between 0% and 20%. If you have sold stocks and realized a gain, the tax rate applicable to you will depend on your regular income tax bracket. The rate varies as follows:

• Regular income tax bracket of 10% up to 15% - You are not required to pay capital gains tax. These brackets are classified as low-income earners, and are, therefore, free of capital gains tax liability.
• Regular income tax bracket of up to 39.5% - Most taxpayers in the intervening tax brackets will pay a maximum 15% capital gains tax rate.
• Regular income over the 39.6% income tax threshold - Capital gains tax rate will be as high as 20% of the net capital gain.

Capital Gains Tax on Real Estate Investments

The capital gains tax for real estate investors looks very similar to that for investing in stocks and bonds. Just like in the case of stocks, there is a difference between the tax treatment of short-term gains and long-term gains. If you are mainly flipping houses on a short-term basis, you have to be careful as to how your holding period will affect your tax payment. Short term gains may be subject to higher taxation as ordinary income. In addition, income not considered truly "passive" may be ineligible for a lower capital gains tax.

Capital Gains Tax on Your Primary Residence

When you are selling your primary residence, you have an opportunity to earn a capital gain of $250,000 or more tax-free. This only applies if the residence is one you have lived in for at least two of the preceding five years before the sale. For couples filing jointly, the size of this tax-free eligible capital gain is $500,000.

Exemptions for Capital Gains Taxes

There are other capital gains tax exemptions you should make use of in case you are eligible for them. They can lower your tax bill considerably, when you realize a capital gain, or eliminate the tax altogether. Here are the most common ones:

• Offsetting gains and losses - If you are investing in stocks and bonds, you may be able to offset some of your capital gains tax with losses you might have experienced.
• House renovation capital expenditures - Certain expenses involved with buying and selling a house may be tax-deductible.
• Interest payments - If you have been paying mortgage interest for a property over the years, you may be able to deduct the interest expense totals from your capital gains tax bill.

Besides these, there are other capital gains tax strategies you can use to minimize your liability. Because the legal requirements can get complex, if you are dealing in property or financial assets with a large capital gain, you should consult with a qualified tax expert who can help you plan adequately.

How to File Taxes as a Real Estate Agent

Source: https://www.life123.com/article/capital-gains-tax-for-real-estate-and-stock-investors-explained?utm_content=params%3Ao%3D740009%26ad%3DdirN%26qo%3DserpIndex

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