Real Estate Capital Gains
Real estate is a great investment. You can make money in 2 key ways:
* Capital Gains - sell the property for more than you pay for it.
* Cash Flow - earn regular monthly income from rents and other sources
Real Estate Gains
A real estate gain is calculated by taking the total net proceeds from the sale of the property, less the cost of sale. You should deduct realtor commissions, taxes, and other costs directly tied to the sale of the property.
Then subtract the adjusted cost basis from your net proceeds. Your cost basis is an intricate number that should be calculated or verified by a qualified tax professional. But basically you take your cost of purchase and adjust it by deducting any depreciation and adding in capital improvements to the property. For instance, if you add on or finish the basement, you can add in a portion of those costs to your cost basis.
If your net sales proceeds exceed your adjusted cost basis, you will have a capital gain.
Long-term vs. Short-term Gain
The general rule for determining whether a gain is long-term or short-term is the one-year rule. If you own the asset for less than one year, it is a short-term gain. If you own it for one year or more, it is a long-term gain. Short-term gains are currently taxed as ordinary income. Long-term gains are taxed at a lower rate. In the United States, the long-term capital gains tax is 15% for most people. Your capital gains tax rate could be higher or lower, depending on your adjusted gross income.
The other main way to make money in real estate is through cash flow. The main way to earn cash flow is through renting out your property. Your cash flow is the difference between your rental income and your total expenses.
* Capital Gains - sell the property for more than you pay for it.
* Cash Flow - earn regular monthly income from rents and other sources
Real Estate Gains
A real estate gain is calculated by taking the total net proceeds from the sale of the property, less the cost of sale. You should deduct realtor commissions, taxes, and other costs directly tied to the sale of the property.
Then subtract the adjusted cost basis from your net proceeds. Your cost basis is an intricate number that should be calculated or verified by a qualified tax professional. But basically you take your cost of purchase and adjust it by deducting any depreciation and adding in capital improvements to the property. For instance, if you add on or finish the basement, you can add in a portion of those costs to your cost basis.
If your net sales proceeds exceed your adjusted cost basis, you will have a capital gain.
Long-term vs. Short-term Gain
The general rule for determining whether a gain is long-term or short-term is the one-year rule. If you own the asset for less than one year, it is a short-term gain. If you own it for one year or more, it is a long-term gain. Short-term gains are currently taxed as ordinary income. Long-term gains are taxed at a lower rate. In the United States, the long-term capital gains tax is 15% for most people. Your capital gains tax rate could be higher or lower, depending on your adjusted gross income.
The other main way to make money in real estate is through cash flow. The main way to earn cash flow is through renting out your property. Your cash flow is the difference between your rental income and your total expenses.
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