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Saving on Capital Gains Tax after a House Sale

If you’re using real estate investments to generate income, you will naturally accumulate capital gains taxes. This is particularly true when you talk about short-term purchases and sales.

Short-term Sales

If a property is sold earlier than three years after it was bought, short-term capital gains tax applies. And it’s going to be hefty, with the gain from this type of transaction being counted as part of the taxable income for that particular year and will be computed accordingly. This gain – determined by deducting total property expenditures from the sale price – can never be exempt from tax.

Long-term Sales

A property sold after the third year of its initial purchase will be subject to long-term capital gains tax. The formula for calculating short-term gain is the same as that used to calculate long-term gain, except that both the initial investment and overheads of the latter are adjusted for inflation, a process referred to as indexation.

The good news is income from long-term gains can also be eligible for specific tax exemptions. If you earn less than the taxable limit, only the portion of the long-term gains that exceeds the limit will be taxed. If you sell an inheritance property or a property that was given to you as a gift, you still have to pay taxes.

Buying a Property with Your Gains

If you use your house sale proceeds to buy a residential property, either the amount you invested or your gains will be exempt from tax, whichever of the two is lower. Limitations do apply, however, as the property in which this amount is invested should be purchased either two years after the first property was sold or one year prior to the sale.

If you build a house from the money you gained, you may also get a tax deduction based on the cost of the land and the building. But you have to make sure that the construction is done within three years following the initial sale. If the income comes from a land sale, total tax deduction is allowed if all of the proceeds were invested in a residential property. But you have to make sure that you don’t own more than one house before you begin investing in the new property.

As you can see, there are several ways for you to save on capital gains taxes. The key is to have a good grasp of how these opportunities can be used to your full advantage. There is just no excuse these days for misinformation. There is so much to know on the Internet, and as long as you pick the right websites, you will surely learn a lot. Of course, it’s still best to speak to a real estate lawyer to avoid misinterpreting tax laws and regulations.

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