Addressing Capital Tax Laws In Maximizing Your Profits

If you are in the business of buying and selling homes, you can make the capital tax laws work for you. You only need to understand how this works and you can increase your profits. Here are some things to keep in mind to help you.

Wait At Least a Year

Investing in rental properties has become a popular way to make money. The great thing about these kinds of investments is that you generally get your money back quickly, and can see the income on a monthly basis. Once you've gotten your money back on the investment, most people look to sell the property. The capital gains tax can work to your benefit here. If you sell the rental property at a loss then you won't have to pay any taxes since no profit is claimed. Of course, we all want to make a profit on our investments. The best option for decreasing the capital from profits is to hold on to the property for at least a year. If you sell your property for a profit, you can expect to pay anywhere from 10% to 25% in capital gains tax, depending on your tax bracket if you've owned the property for at least that one year period. Properties sold before that one year mark will be considered a short-term capital gain and this is taxed more heavily, as high as 35%.

Live in the Home First

The United States allows you to forego the capital gains tax if you lived in the home and met certain criteria. If you lived in the home for two to five years before you sell the property then you are considered a home owner. A home owner can rent the property out for up to two weeks each year without being taxed. As a homeowner you won't have to pay the capital gains tax at all.

Reinvest

Another way to eliminate capital gains tax and maximize your profit is to reinvest the profit in to another property. The 1031 exchange allows you to legally defer your capital gains tax as long as you are reinvesting the money from the profit to buy another property that is similar. This works only if you sell a home and then purchase another one. You can't sell a single family home and invest the profits in a multi-family dwelling to avoid the capital gains tax.

Understanding how the capital gains tax works will allow you to pay less in taxes. Since you pay less in taxes, you get to keep more of your profit. This is the easiest way to maximize your profits.