Blog Post From a Friend: Capital Gains

Real Estate: Utilize Capital Losses to Deduct From Capital Gains

Whether you own your residence, additional investment property, or will be inheriting real estate, you may be subject to capital gains tax. A capital gain or loss refers to the net difference in value of an investment, between when it was purchased and present day. If you purchased an investment that has accrued value over time, it would be considered a capital gain. If the investment has depreciated over time, it would be considered a capital loss. For example, if stock was purchased for $100 a year ago, however, today you sold it for $150 dollars, the capital gain would refer to the additional $50 your investment produced. This additional profit is subject to capital gains taxes.

For individuals that invest in real estate, the capital gains tax after a sale can be significant. However, there are methods used to lower or avoid these taxes. One primary method used in investment is to allow capital losses to deduct from capital gains.

Suppose your profitable investments for the year acquired $500 in capital gains, however, your capital losses amounted to $300 that year. You may use the losses to deduct from the gains, so the capital gains eligible for taxes would be $200. Savvy investors know how to utilize their losses to produce a net gain. Gains and losses are only taxable after the stock or investment transaction has occurred. Meaning, if you invested in a piece of real estate for $100,000 a year ago, and it appraises for $200,000 today, as long as you have not sold the property, that $100,000 difference is not “realized” and therefore not considered a capital gain. However, once you do sell the home, that profit is now considered to be a realized capital gain, and will be taxed accordingly.

Smart investors will know the appropriate time to sell an investment so that they may use the losses to reduce the tax on the gains. In some cases, investors will sell an investment, and forward the money made from the transaction to purchase other favorable stock or property. This way, the depreciated value of the initial investment can cover the gains for the year, while the money used from the sale now has the opportunity to multiply with the purchase of the other investment.

Additionally, any realized losses can carry over. Up to $3000 in realized capital losses can be deducted from your income as well. If you leave behind real estate to your heirs as a component of an estate plan, your heirs will not be forced to pay capital gains on that inheritance at the time of your passing. However, if you leave behind a $300,000 home to a beneficiary, then the beneficiary waits a year and sells the home for $400,000, that profit of $100,000 may be taxed as capital gains.

The tax and real estate laws can be difficult to navigate. It may be beneficial to discuss your real estate affairs with a real estate attorney. The attorney may be able to provide insight on taxes and laws regarding real estate to help protect you from making a costly mistake during a real estate transaction.

Thanks to our friends from Cohen & Cohen for their insight into real estate.