Capital Gains Tax Loopholes Shrinking

By: Carol Freyer
Submitted: 2008-08-15 17:44:07
Print this article | Tell a friend | For publisher | Social Bookmarking
Rating:
 

Seems the new 2008 housing bill was not a savior for all of us - like a scorpion there is a little kick in the tail! However, struggling home owners can breathe easy, the kick is not directed at them, in fact, it is aimed at real estate investors.

Whoever it is aimed at in the real estate market, it will not give the realty world a much needed boost as it is yet another deterrent to buying a home, this time aimed at investors.

Capital gains tax is always part of the profit and loss formula when investing in realty, and the levels were generously high for both investors and regular residents who live in their home. Residents still have the same concessions but now it has changed for investors.

To re-cap on the capital gains that was - and still is for residents owning one house in which they are living and have lived for two years: the allowance on capital gains is $250,000 for a single person and $500,000 for a married couple.

Capital gains taxation is only charged on the profit made on the sale of the house, which is usually not necessarily on the actual sale price of the house.

However, there is a marked change in the taxation laws for people who buy a home and rent it for a while and then move into the home for a two year period prior to selling it.

It used to be possible to sell the home and convert all the profits that were made when it was a rental into tax free income under the capital gains umbrella. The new law has changed all that.

Even though investors may have lived in the rental home for two years before selling it, their capital gains allowance is no longer sacred. The new law says it must be calculated pro-rata and is divided between the taxable years that it was a rental property and the non taxable years when the owner lived in it.

This new rule comes into effect on January 1st 2009 and this is a hypothetical example of how it might look. You buy a home in June 2009 for $400,000 and you rent it out for three years, live in it for two years and sell it in June 2014 for $700,000. (Dream on!)

This means that you have a capital gain of $300,000 (assuming that nothing can be used as tax write-offs). Under the old system you could be exempted from capital gains tax by using your single person's allowance of $250,000 capital gains exemption. This means that you would have only had to pay capital gains tax on the last $50,000.

This no longer applies; now the tax department will tell you that yes, you may claim the capital gains exemption for the two years that you were actually living in the residence i.e. you can claim two fifths of the $300,000 profit against your own personal allowance of $250,000. This calculates into $120,000.

However, for the other three years -when it was a rental property - the capital gains tax is applicable. Therefore, you will pay the percentage rate of capital gains tax on the remaining $180,000 (three fifths) of the profit of $300,000 that you made when you sold the house.

PorchLight Real Estate Group combines local market knowledge with cutting edge marketing skills. For more information on Denver CO real estate or to do a search for Littleton homes, visit us online at PorchLightGroup.com.

Article source: Expert Articles

Most Recent Articles in Taxes category

  • Use the Appraisal District's Information to Reduce Your Property Taxes - By: Patrick C O Connor
    Homeowners are amazed to learn they can obtain a copy of the appraisal district's evidence at a nominal cost. This is referred to as a House Bill 201 package, and is the only information many homeowners use to successfully reduce their property taxes.
  • Tax Return Outsourcing - Cost and Time Effective Services - By: Michelle Barkley
    Tax return outsourcing has simplified the cumbersome task of maintaining tax returns files and data in an efficient manner.
  • Optimise Savings with an Offshore Account - By: Isla Campbell
    Offshore accounts, based in the Channel Islands, the Isle of Man and Ireland, offer many benefits to those wishing to set up a savings account. But what are the advantages of cash conservation offshore.
  • Texas Business Personal Property Rendition and Taxation - By: Patrick C O Connor
    The Texas Property Tax Code for many years had required owners of business personal property (BPP) to annually render those assets used in a business. Rendering is summarizing to the central appraisal district the ownership and value of the assets. Historically, however, over half of all owners of business personal property have not rendered.
  • How to sustain current economic slump? - By: Mark Waltzer
    Small businesses need professional accountants but their services are too expensive so it's better to hire an outsourcing vendor providing cost-effective accounting services and allow them to take your business to next level.
  • Texas Property Tax Appeals - By: Patrick C O Connor
    Texas Property Tax Appeals Steps to Protesting and Reducing Your Property Value Annually
  • Taxes - By: Patrick C O Connor
    Taxes are a levy imposed upon people or legal entities by a governmental entity. There are many forms of taxes including income taxes, property taxes, capital gains taxes, consumption taxes, excise taxes, retirement taxes, sales taxes, tariffs, toll taxes and transfer taxes. This article focuses on reducing income taxes for real estate owners.
  • Gift Tax Valuations - By: Patrick C O Connor
    Gift tax valuations are prepared for many reasons. Gift tax includes market value of gifts to charity, market value of conservation easements and gifts in excess of annual limit. Well-reasoned planning of gifts can minimize gift taxes, income taxes, and estate taxes.
  • Please keep your hands out of my pockets Uncle Sam!: Business tax savings you should know about. - By: Amar Brown
    Many people are unaware that a business including a home based business can mean thousands of dollars in tax advantages per year. Thousands that you can put back into you pocket. Here are a few tips on keeping Uncle Sam Out of your pockets and keeping more of your hard earned money in.
  • Cost segregation - correctly depreciation real estate 10 - By: Patrick O'Connor
    Depreciation is an important non-cash tax deduction. By increasing tax deductions, commercial property owners affect federal income tax reduction. The increase in tax write-offs generates such a large tax cut that some wonder if it is a tax shelter or tax evasion scheme. It is not. Cost segregation is an IRS-guided process used to increase tax deductions during the tax preparation process. The IRS has provided a detailed explanation of the items that qualify for short-life depreciation and acceptable methodologies for performing a cost segregation study. Cost segregation studies performed by appraisers in compliance with the IRS's Audit Techniques Guide are unlikely to be challenged in an audit. Commercial real estate owners seeking tax advice and tax relief can benefit from reviewing the tax relief available from cost segregation.