After a long day of work, the last thing you want to do is spend hours poring over complex tax laws. But as a savvy real estate investor, it's important to have a clear understanding of the different types of taxes you may be liable for. In this blog post, we're going to clear up any confusion around real estate taxes and capital gains.
Are Real Estate Taxes the Same as Capital Gains?
No, real estate taxes and capital gains are not the same thing. While both types of taxes can be substantial, they serve different purposes and should be treated as such in your tax planning strategy.
What are Real Estate Taxes?
Real estate taxes are annual taxes that are levied by state and local governments on property owners. The amount of tax you pay is based on the value of your property. Real estate taxes are typically paid by the property owner to the government entity that has authority over the property, such as a city, county, or school district.
What are Capital Gains?
Capital gains are profits that an investor realizes when they sell an asset for more than they paid for it. For example, let's say you buy a property for $100,000 and sell it later for $150,000. The $50,000 profit you made is considered a capital gain. Capital gains can be taxed at either short-term or long-term rates depending on how long you held the asset before selling it. Short-term capital gains are taxed at your ordinary income tax rate, while long-term capital gains are taxed at a lower rate.
1031 Exchanges Can Help with Capital Gains
1031 exchanges can be an effective tool for real estate investors who are looking to defer capital gains taxes on the sale of an investment property. By reinvesting the proceeds from the sale into another "like-kind" property, investors are able to defer taxes on their gains and compound their returns by using leverage to buy additional properties.
If you're thinking about conducting a 1031 exchange, be sure to consult with a qualified intermediary to ensure that your transaction meets all of the necessary requirements. Our QI's at Brazos1031 Exchange serve clients throughout the United States and we are here to answer any questions you may have about the process. To schedule a consultation, simply contact us at (888) 508-1901.