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Last Updated: May 14th, 2012 - 22:24:01 |
If you buy a stock, make a profit, and sell that stock, you'll likely pay a capital gains tax on that profit. People say, I don't want to do this real estate deal because if I sell the property, I'm going to make a lot of money and pay a lot in taxes, so I'm not going to do real estate.I have a different point of view.
One of my goals is to write the IRS a check for $5 million. I love to pay taxes because if I pay $5 million, that means I made $12 million and get to keep $7 million. If I send the IRS $100,000, that means I made $300,000 and kept $200,000. Real estate carries some distinct tax advantages. In many cases, you can sell real estate without paying any taxes. You can buy and sell in a self-directed individual retirement account (IRA) or do a 1031 tax-free exchange if conditions permit.
Operate as a Business
You've just stated a business investing in real estate. You're driving your car to look for properties, talking on the phone, and maybe taking trips related to your business. All of that adds up to expenses that can be taken as tax write-offs on your income tax return.
I recommend that you check with a knowledgeable accountant about write offs in your situation. Owning and operating a business comes with specific tax advantages. For example, now that you're actively trying to make a profit in real estate, you can buy a computer and a copy machine for your business (plus phones, business-related gasoline for your car, etc.) and write off some or all of these expenses.
Do you like having gifts from the government? Suppose you make a good start in real estate and study all of these materials and then say, I see how to make money in real estate; I understand all the credit finance techniques. But it's not for me. I don't want to make all that money.Congratulations, you're still going to make an incredible return on the time you invest learning about real estate investing, because if you buy your own home for even 15 percent below that it's worth to say you get a $500,000 home for $450,000 ¨C five years from now, you might be able to sell it for $700,000 and make $250,000 profit. How much tax would you likely pay on the sale of that house it it's your own home and you¡¯re married? Zero. That's because if you're married, you get a $500,000 exemption if you've owned the home for two years. In addition, you can get that exemption every two years. So every two years, you can buy your own home, sell it, make a lot of money, and likely pay no taxes.
Rental Property or Investment Property
Say you've had a small apartment building or 10 houses worth $300,000 each for 15 years that you bought for $3 million. About 15 years later, the worth doubled and you can make $3 million if you sell. You'd have to pay capital gains tax ¨C about 20 percent depending on your tax bracket ¨C on your $3 million in profit. That adds up to $600,000 in taxes, and you may have to recapture and pay taxes on some or all of the depreciation you took.
It's worthwhile getting information so you don't have to pay that, including finding out about doing a 1031 tax-free exchange. This tax exemption is available for investment property owners when you sell a property and buy a similar one for more than the amount of the first one. (The sale must take place within a certain time period). Be sure to work with a qualified tax advisor who knows all the rules and regulations in your state. Chances are, you'll pay zero in taxes again.
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