Investment Property Taxes Capital Gains – What Louisville Investors Should Know

If you’re a real estate investor looking at selling a property, or if you’re thinking of buying a property now and thinking long term about selling it, then you might be worried about what taxes you’ll incur. In this blog post you’ll read about investment property taxes capital gains – what Louisville investors should know about capital gains.

Before you read further, you should be aware that this information is provided in general to a wide range of readers – each person reading in a different area inside or outside of KY, perhaps with different corporate structures, any many other factors. So we’re providing a helpful overview but you should always talk to an accountant and tax attorney before making any final decisions for yourself.

Different Types Of Tax For Different Types Of Income

There are different types of tax for different types of income. For example, income that comes in from a job you work at will likely be taxed as regular “earned income”, and the percentage that you pay in taxes depends on the dollar amount of your yearly income.  With “earned income” you will also have to pay into Social Security, Medicare, and potentially other withholdings.  After your taxes and withholdings are deducted, that equals your “net income” from your job.

Business income and income created from real estate, stocks, and other investments are taxed at a different tax rate. For a stock market investor, for example, income derived from dividends earned have their own tax rate. And for real estate investors, you should be aware that income derived from capital gains on the sale of a property has its own tax rate.

What Are Investment Property Taxes Capital Gains?

Let’s start back at the basics: When you buy a property, you pay a price.  When you sell a property, you get what the next buyer pays you. The difference between the price you bought the property for and what you sold the property for is the capital gain. Let’s say you bought the property for $100,000 and you sold it for $125,000. The capital gain is $25,000 and this is the income that is taxed at the capital gain rate.

Why Do Capital Gains Have A Different Rate?

Capital gains tax rates are usually less than the rate you pay for your regular “earned income”. There are a couple of reasons why capital gains are taxed differently: one of the reasons is because the gain can be quite substantial on a piece of real estate, so a normal tax rate can be quite prohibitive to pay.  A capital gains tax rate is like keeping extra money in your pocket. The other reason is because the government wanted to encourage the buying and selling of assets (which is good for the economy) so they provided an incentive (a lower rate) to do so.

Capital Gains On Investment Property Versus Your Primary Residence

You should also be aware that capital gains on the sale of your personal residence (the house you live in) may be treated differently than other property you own and eventually sell. Some important factors include: whether you live in the house and for how long, or whether it’s a secondary property (such as a cottage), or an investment property such as a rental property. You should talk to a tax attorney about this because the situation will be different for everyone.

If you want to know more about real estate investment properties, or if you want to get introduced to a good tax attorney who can help you optimize your tax situation, click here to enter your information, or pick up the phone and call 502-255-2035.

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