When you sell this asset it is considered a capital gain and the IRS requires you to pay taxes on the gain. Obtaining the gain amount is a matter of deducting the original purchase price and any expenses associated with selling the property from the sale price.
Although profit is a gain and is taxable, the length of time you hold the property does affect your tax filing in the year you sell the property. Property held for longer than a year has a tax rate of 15 percent and people in the low-income tax rate who hold a vacant lot for at least this term pay a 0 percent tax rate on long-term capital gains.
However, taxes you pay on short-term gains require payment at a higher rate. Generally, this is the same rate as your income tax rate, which could be as much as 35 percent. To get the amount of loss you subtract the selling amount from the amount you paid for the property. If you are selling a rental or business property and buying another, you can do what is called a Section exchange, named after a portion of the tax code, to reduce or eliminate your capital gains.
It's also known as a like-kind exchange, since you are selling one type of property, namely real estate, and buying something equivalent. The exact nature of the properties doesn't matter.
Essentially, you must sell one piece of investment or business real estate and quickly buy another to defer your taxes until you sell the final piece of property. You must have an organization called a qualified intermediary hold on to the proceeds of the sale. If you receive cash or a check, you won't be eligible for the exchange. Then, you must identify the property you want to buy within 45 days of the sale and close the deal within days of the sale to be eligible.
Any additional profit you make beyond what you spend on the new property must be recognized as either income or capital gains. Section exchanges can be a good way to buy and sell investment real estate without paying unnecessary tax, but you must make sure you comply with the rules or you can face an unexpected, potentially large tax liability.
Consult with a tax lawyer or tax preparer if you're not sure how to do the exchange correctly under the law. You're also not allowed to use Section to buy and sell your own homes or, under current tax law, for property other than real estate, such as equipment or vehicles.
You may also see a state or local tax bill from the sale of your real estate. Most states have a real estate transfer tax system, where the seller is typically responsible for paying a tax on some portion of the property price. In some cases, the buyer may agree to cover the tax. The tax can often be added to the property's cost basis for capital gains tax purposes. You should also work with your local city or county government to make sure you don't overpay or underpay property tax when you sell your land.
Steven Melendez is an independent journalist with a background in technology and business. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors.
This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. However, there are other issues with filing separately that might make it better to file jointly regardless. For example, if you file jointly, and one of you itemizes deductions, the other one must itemize as well. The only way to figure out which strategy minimizes your overall tax bill is to create proforma tax returns both ways.
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