RESOURCES - CAPITAL GAINS
Investment in real estate can offer numerous advantages, such as tax deductions on business expenses, depreciation, and amortization. However, it is essential to understand the implications of capital gains tax as it applies to both real estate and equity investments.
When the value of a property increases above its cost basis or adjusted tax basis, a capital gain occurs. Conversely, a capital loss occurs when a property’s value falls below its cost basis or adjusted tax basis. To calculate capital gains tax, it is crucial to understand three key terms: capital asset, adjusted basis, and the holding period.
Capital gains tax applies to both state and federal levels, with short-term gains being taxed as ordinary income, ranging from 10% to 37% depending on the tax bracket. In contrast, long-term capital gains are taxed at a lower rate, up to 20%, depending on income and filing status.
It is crucial to understand that any profit cannot be realized until a property is sold, at which point taxes on the gain must be paid. The adjusted basis, including acquisition costs and capital improvements, is used to calculate taxable gains. States have varying tax rates for long-term capital gains, with California’s highest tax bracket paying a total of 33.3%, including the 3.8% Medicare surtax.
Calculating capital gains tax on commercial real estate requires factoring in cost basis, net proceeds, and depreciation recapture taxes over the holding period of the investment. It is essential to consult with a tax professional for guidance on how to minimize tax liabilities and maximize investment returns.
In summary, owning investment real estate offers several advantages, including tax deductions, but it is crucial to understand the implications of capital gains tax and other tax obligations. By working with a tax professional, investors can make informed decisions to minimize tax liabilities and maximize investment returns.
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