How Do Capital Gains Taxes Changes Affect Investors?

Among the most dreaded changes of President Barack Obama’s second term are those looming for the capital gains tax – the tax imposed on profits from transactions involving nearly every asset an individual can own. Amid the uncertainty surrounding the fate of the capital gains taxes, many individual are rushing to sell assets such as houses before the end of 2012 to keep tax liability at the old rates of around 10 percent. For real estate investors the picture is mixed, with some benefits applying only to investment property and others relating to residential property.

The capital gains tax is imposed on virtually all assets that are privately owned, including real estate. When a capital asset is sold, the difference between the amount paid for the asset and the amount for which it’s sold is either a capital gain, if money is made on the transaction, or a capital loss, if money is lost. While capital losses can benefit

investment property owners, capital gains can be a tax liability – especially if the capital gains tax goes up, as promised, by the second Obama administration.

Capital gains and losses can be classed as either short or long term, depending on the length of time an investment property is held before it’s sold. If a property is held for more than a year, it’s a long-term gain or loss for less than a year, it’s considered short term. These two kinds of capital gains and losses are balanced against each other when the net gain is being calculated.

Everyone must report capital gains on income taxes. The tax imposed on capital gains on real estate owned by investors and residential homeowners alike is generally lower than the tax rates that apply to other sources of income. But at the same time, the proposed increase to capital gains taxes may push the rate in some tax brackets to over 20 percent — and it’s this increase that has some property owners rushing to sell quickly before the new capital gains rates take effect.

But within the framework of capital gains tax laws, investors reap a few benefits over those available to residential homeowners. Although both kinds of property owners must report all capital gains, only investment property owners can deduct capital losses on the property. Property owners who calculate a net capital loss in excess of the annual limit on capital loss deductions can carry the excess over to the next year’s tax deductions, treating it as if it was incurred in that year.

Although changes may be looming for the structure of the capital gains tax, rest assured it”s not going away. But for income property investors following Jason Hartman’s investment strategies, the current law allows some benefit not available to residential property owners. Real estate investors see only that capital gains taxes are

slated for a raise in the coming years of Obama’s continuing presidency. But, as written, these laws offer benefits for investors as well as those owning a home for residential purposes. (Top image: Flickr | waywuwei)

The American Monetary Association Team


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