Before you get all excited about selling rental property for juicy profits, it's crucial for you to learn how to slash your capital gains tax first so that you can maximise your hard earned profits. Find out how smart property investors cut down or even eliminate their taxes right now.
What are Taxes You Will Have to Pay When Selling Rental Property?
Capital gains tax is a type of tax that is imposed on the profits that you earn from selling investments such as your shares or rental property. As the name suggests, you won't have to pay a single cent if your rental property was actually sold for a loss.
So how much can you expect to pay? Depending on which country you live in, you can expect to pay anything between 10 to 30%. The good news for some is that there are actually no such taxes for them to worry about. This includes rental property owners who are lucky enough to be in Hong Kong, New Zealand or Singapore.
If you are from the U.S. and hold on to your property for at least 1 year before selling it, your tax rate will range from 10% to 25% depending on your income tax bracket.
However if you sell your rental property after holding it for less than 1 year, your profits are considered as short term capital gains and you will be taxed more heavily at the same rate of your ordinary income tax. This will mean you can expect tax rates of 10% to 35% depending again on what is your taxable income.
How to Cut Down or Even Totally Eliminate Your Capital Gains Tax
Before selling rental property take a closer look at your country's tax laws first to see if you can spot any loopholes that you can exploit.
For example do you know that foreign property investors in the U.K. do not have to pay these taxes and in Russia you can avoid it completely by owning the rental property for at least 3 years before selling.
If you live in the U.S., it's vital to know how the legendary 1031 exchange works so that you can milk it to legally avoid paying any money for your capital gains.
What makes the 1031 exchange so popular with rental property owners is that it allows your to defer paying taxes on your capital gains tax as long as you reinvest the money from the property sale to buy another similar type of property.
In some countries such as the U.S., home owners enjoy lower tax rates than property investors when selling off their homes. If you can find a way to qualify as a home owner instead of a rental property investor, you can enjoy these tax savings as well.
For example in the U.S. you can be considered as a home owner if you lived at least 2 of 5 years before selling off the property. You are also allowed to rent out your property for 14 days or less every year without being taxed.
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