Investment Property Jargon Explained - Capital Gains Tax

The second in our series of articles about investment property jargon looks at capital gains tax.

If you successfully make money through buying and selling an investment property you'll want to hold on to as much of that profit as possible. So a thorough understanding of capital gains tax is essential.

The concept of capital gains tax is much the same in any country or market, it is a way for the local fiscal authorities to raise cash from the profit made by investors in real estate, as well as other asset groups.

The gain in capital you make on your investment property is essentially the difference between the price you paid and the price you sell it at. In other words: the profit.

Usually, capital gains tax is calculated as a simple percentage of this profit, but it may be possible to deduct other expenses from the gain, which will bring the amount down, and with it, the tax you pay.

In some areas the rate of inflation will be taken into account too, allowing you to calculate the "real" gain in capital relative to the economy as a whole.

As with most tax laws, people have always sought loopholes or ways to avoid paying it. In less scrupulous markets it's possible that the reported sale price of some investment property is lower than the true amount, thus reducing the investor's tax burden.

In countries where the sector is poorly regulated or policed, it's possible that a large part of the purchase price is paid "under the table" in cash, so the reported transaction price is lower than the real amount.

In its simplest form, the equation to calculate capital gains tax on investment property is:

(Sell Price - Buy Price - Deductible Expenses) x Capital Gain Tax Percentage Rate.

Since capital gains tax regimes can vary significantly between different countries and property markets, it is well worth seeking out an experienced adviser, such as an accountant, notary or lawyer, who can guide you through the different solutions.

If possible, find someone that is familiar with investment property in particular, since the rules for taxing real estate may be different to those for other types of assets with gains in capital.

The money they save you could pay for their services many times over in some cases, so it is well worth seeking their advice. For example, they may have tips on how to structure your deal so you can maximize the deductible expenses that you can subtract, or find a way of charging a lower tax rate on your capital gain.

Either way it's very simple: the more you can save on capital gains tax the more you can make on the sale of your investment property.