Search the Silver City MLSThere are usually tax consequences with every real estate transaction. There may also be opportunities for tax breaks for the savvy investor. Understanding the obligations, liabilities, and the legal tax break angles in real estate are in every investors best interest.
Lets look briefly at how taxes on wages and taxes on real estate investment measure up. I think you will see that there are definite advantages of one tax rate over the other.
Real Estate Investment Income Taxes vs Basic Wage Tax:
Capital Gains Rates
The maximum federal tax rate on capital gains is 15%, whereas wage income is generally taxed at 35%. There are state taxes too, with some states offering deeper discounts on capital gains income. You won't find discounts on regular wages.
Remember, for you to be able to use the capital gains rate, it requires that you hold a property for 12 months or more before selling.
Exemption for Principal Residence
If you sell your residence, the first $250,000 is exempt from gain or $500,000 if you are married.
Remember, the rules require that the residence was used as your primary residence for two of the last five years.
1031 Exchanges
Under IRC Sec 1031, you can roll your profits into more real estate and defer paying taxes altogether. Your tax basis rolls into the next property. The rules are rather stringent, in that the exchange must be completed with 180 days and the exchange property must be indentified with 45 days of the sale of the relinquished property.
This may be an area worthy of additional bandwidth. This is another tax break area where professional help is recommended.
Interest Deduction
You are allowed to deduct all interest you pay on debt you have used to acquire your real estate.
Depreciation on Investment Property
You get a tax deduction for the “wear and tear” on the structure, even if the property increases in value! Thus, it's possible to actually break even (or make money), but on paper show a loss to offset other income.
Now that is pretty slick. Like the 1031 exchange listed above, in this area the accountant may be the real estate investors best friend.
No FICA Tax
Your income from real estate is generally not subject to FICA tax withholding. Regular self employment income is subject to 15.3% tax on the first $97,000, and thereafter your earned income is subject to medicare withholding.
Remember this important thought.
It’s not just what you make, it’s what you get to keep after taxes that matters… The type of income and where your income comes from are significantly important to your bottom line totals. Bottom line earnings from investments in Real Estate are generally larger (dollar for dollar earned) than standard wage income because of the legal tax break benefits available to RE investors....----archer---->
Want to keep more of what you’ve earned? Want to know more about the tax liability in selling real estate? There are many good online resources which fully explain the tax consequences and the tax breaks which real estate investment income is subject to. Yahoo and Google offer a full load of tax information links and they are free for us to use.
What is my house worth in today's market? Visit Archer's Dream Home New Mexico and use the online form there to request your free CMA (Market Analysis).
More coming soon. Your comments are always appreciated, and your suggestions are taken seriously. ----archer---->.
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