A lesson in Capital Gains

This was a specific question from a friend from my high school days. He wanted to know how capital gains works with investment properties. Granted, there should be some caution in reading this as I do not have all of the specific information for a particular tax scenario. You should likely discuss this concern further with your accountant. ;)

If there is anyone out there that doesn't like numbers, please stop reading. If you're still reading this, I think you might learn something that could be very important.

This is how capital gains works when it comes to an investment property. In its most basic form, it is the proceeds from the sale of the property less the cost of that property. Let's use a couple of numbers. You paid $100,000 for a rental property and you sold it for $150,000. Your capital gain would be $50,000. Of that $50,000, you are generally taxed only 50% of this amount. Therefore, $25,000 gets added to your income for the year.

What kind of tax do you pay on this? Well, it really depends on what tax bracket you fall under. Hence, it is important to discuss this with your accountant. There are things like loss carryforwards, capital gains reserves, principal residence exemptions and cost capitalization that can affect your tax implication. It's beyond the scope of this blog, so if you are serious about investing you really need to learn to find a good accountant. I cannot stress this enough.

The reason is that cash is king when it comes to real estate investing. You need to know how to manage your cash through tools like leveraging, and financial structuring. I'm not just trying to use big business words, but trying to encourage you to use professionals when it comes to these types of decisions. I think it is absolutely critical that you have a professional that you can trust, so choose carefully :P