When Selling Rental Property, How Do You Stretch Your Profits?

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.

Tax Saving Strategies For Capital Gains on Rental Property

Have you recently sold any of your rental property? Are the taxes on your capital gains are a burden for you? Are you looking for some way out to reduce these taxes and keep most of the profits you made from this transaction?

Then you need to know some intricacies of capital gains tax rules.

If you had purchased rental property at a lower price and now sold it with a respectable margin on it, this difference you could get is the capital gain and the same is taxable.

Remember, IRS gives preference to home owners. An average home owner will be charged leniently as compared to a property investor. So the capital gains tax varies as per different types on property owners.

One good thing about the capital gains tax is that it is lower than the income tax. It is convenient if you buy the property and wait for one year before you sell it. This way you will have to pay taxes at an average rate of 10 to 25 %. But if you plan to sell your rental property before one year, then your earning is considered as short term capital gains and you have to pay heavy taxes on it which may be same as the ordinary income tax.

If you have your rental property overseas, you need to check the capital gains taxes rules over there. As in some countries like United Kingdom to encourage foreign investors, they do not charge any tax from them for their capital gains.

Some useful tips for saving on this tax:

You can avail the benefits on tax savings by becoming a home owner than a property investor.

To qualify to the criteria of home owner, you have to stay in your rental property for a minimum of 2 years. You may have rented it in past  but then you have to stay in it for two years out of five years block before you sell off. Then it will be considered as your own home for tax purposes.

If you are a married couple selling your own home, the profit of first $500,000 is not taxable as against a sole owner who is eligible for tax exemption on the first $ 250,000.

If your sale is just a rollover, you may be charged absolutely nothing towards your capital gains. So you are selling your rental property only to purchase a new property of that type, it will be a rollover.

This rollover refers to section 1031 of the internal revenue code. To satisfy the clauses of this section you have to finalize on a new property within 45 days of the sale and the deal has to be completed within 6 months.

Remember, selling your rental property in cash emergencies is not a good idea. Then it is difficult to reduce the liability on capital gains. And this is the reason why I advise property owners to put aside some of your funds for emergencies such as major repairs.