5 Common Misunderstood Capital Gains Facts Every Real Estate Investor Should Know

There are several misunderstood facts about capital gains that real estate investors should be aware of when buying, selling, or exchanging properties. These include:

  1. Capital gains taxes can be deferred through a 1031 exchange: Many real estate investors are unaware of the benefits of a 1031 exchange, which allows them to defer capital gains taxes when selling a property and using the proceeds to purchase another property of equal or greater value. By deferring taxes, investors can reinvest the full amount of the sale proceeds, allowing for greater investment and growth.

  2. Depreciation can affect capital gains taxes: Depreciation is a tax deduction that real estate investors can take for the wear and tear of their properties. However, when a property is sold, any depreciation taken on the property is recaptured, meaning it is added back to the sale price, potentially increasing the amount of capital gains taxes owed.

  3. Capital gains tax rates vary based on income: Capital gains taxes are not a fixed rate and vary based on an investor’s income. Investors with a higher income may be subject to higher capital gains tax rates, which can have a significant impact on their profits.

  4. Capital gains taxes can be offset by losses: Real estate investors can offset their capital gains taxes by using losses from other investments or properties. This strategy is called tax-loss harvesting and involves selling losing investments to offset the capital gains taxes owed on profitable investments.

  5. Capital gains taxes are only owed when a property is sold: Real estate investors are only required to pay capital gains taxes when a property is sold. If they hold onto a property, they are not required to pay any capital gains taxes until they sell it.

Understanding these and other facts about capital gains can help real estate investors make informed decisions and maximize their profits while minimizing their tax liabilities. It’s always a good idea to consult with professionals to understand the tax implications of any real estate investment strategy. 

If you have 1031 exchange-related questions, our qualified intermediaries are here to guide you through the process and help you utilize this tool to lower your tax burden.  To schedule a consultation, contact us at (888) 508-1901.

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