Yesterday I stumbled across a tax break, I could not believe even existed.
It is strange that nobody talks about this tax break, although it is extremely beneficial for real estate investors.
Did you know that you can sell an investment property for capital gains of $67,900 and don’t pay a penny in taxes?
Yes, that’s true. Thanks to the tax cuts enacted by the previous administration there is a ZERO tax rate for capital gains, such as investment properties you owned for more than a year.
There are only 2 caveats.
- Your federal income tax bracket has to be 10% or 15%. This means your taxable income cannot be more than $67,900, if you are filing a join return.
- You still have to pay State taxes on the capital gains. For a taxable income of $67,900 the taxes in the State of Ohio add up to approximately $2,300.
The good news is that this tax break will still be available for the 2010 tax year.
Real Estate Investors Could Save up to $10,000
This is a wonderful opportunity for real estate investors. If your income consists mostly of rents you can probably claim a good amount of deductions. The depreciation of rental properties is one of the best ways to reduce your earned income, because it is only a “paper” expense. If you don’t make a killing flipping properties, you probably keep your earned income in the 15% tax bracket.
Let’s say you sell a rental property you owned for more than a year. The sale of investment real estate is considered capital gains by the IRS. Your profit of the sale may be $20K. However, your gain is more than the cash you receive at closing, because you have to recapture depreciation you took in previous years. So you may have to claim $30K in capital gains on your tax return, even if you only received $20K at closing.
In this case you would have to pay taxes for your earned income (less than 15%), but the profit you made from the sale of the investment property is completely tax free.
Disclaimer: This was just an example. I am not an accountant and I can’t give you tax advice. So, please call your CPA or accountant and develop your tax strategy for 2010.
Thanks for reading our Columbus HUD Homes Blog
Posted by: Susanne Novak, ABR, FIS, GRI
Columbus Realtors specializing in
HUD Homes, Shortsales, Investment Real Estate
(614) 975-9650
