Do I pay income tax on investment income?

[Grace Navera]

Newbie question here- do I pay income tax on investment income?

I haven’t heard it addressed at all yet in the podcasts and other materials I have come across.

Thank you!

[Ned Carey]

@Grace Navera Basically yes, you pay tax on virtually any income other than a gift.

The question is "what kind of income and what kind of tax?" This is a complex question, I'll do my best to give a  simple answer.

Rent income, interest income, or dividend income is added to your earned income and taxed at the same rate. However you do not pay social security and medicare tax on that income like you do on earned income.

A capital gain is when you sell an asset like a piece of real estate, or stocks for more than you paid. In other words your profit from the sale. Short term gains - for things held less than a year. are taxed at your regular tax rate. Long term gains, things held more than 1 year are taxed at a lower rate.

If you are flipping houses, that is considered earned income even if you have it more than a year. You pay your regular tax rate plus the social security and medicare tax.

As mentioned above if you have business expenses, like repairs on your rentals you get to deduct those from your income. 

If you hold rental real estate you get to "depreciate" the property. You get to deduct a small part of the cost of the property every year.  In some cases you can actually make a  profit  from real estate rentals and yet take a loss on your tax return due to the "Depreciation"

This is the basics simplified. The devil is in the details and there are a LOT of details when it comes to taxation. The IRS has lots of free publications that talk about this in more detail. You should definitely talk to a professional tax preparer familiar with real estate, because mistakes or setting things up wrong can cost you a lot.