Deduct Capital Gains Tax from Your Real Estate Profits

[Corey Dutton]

Capital gains taxes can take a huge bite out of a real estate investor’s profits on the sale of an investment property. This is because an individual, who has capital gains income, is subject to both federal and state capital gains taxes. Pay attention to the state capital gains tax in the state where a property is located. For example, in California the state capital gains tax rate is 13.3%. When you combine the state rate with the federal rate, a real estate investor could pay as high as 33.3% in capital gains on the sale of an investment property in California!

Real estate investors who want to defer capital gains taxes on the sale of investment real estate may utilize the well-known, “1031 Exchange.” This is called such because it’s under IRS Section 1031. But in order to “exchange” one property for another, and thus defer paying capital gains taxes, the new real estate investment property purchase must meet certain criteria. For buy and hold real estate investors, as long as you've held the property for at least one year, the federal capital gains rate in effect as of 2013 was 15%.

The U.S.’s top marginal tax rate on capital gains, combined with state rates, far exceeds the average rates in the rest of the industrialized world. By proposing to increase taxes on capital income, as suggested in a recent budget proposal, it will prohibit U.S. consumers from saving and will lead to reduced levels of investment activity which will then slow economic growth. By lowering capital gains taxes, the result would be increased investment and economic growth. If you’re a beginner in real estate investing, don’t forget about capital gains taxes, which can take a huge chunk out of your profits! Also, find out the state capital gains tax rate in the state in which your property is located so your estimated numbers will be more accurate.