When Selling Rental Property How do You Stretch Your Profits?

How are You Affected by Capital Gains Tax When Selling Rental Property?

Capital gains tax is a type of tax that is imposed on the profits that you earn from selling investments such as your shares or rental property. As the name suggests, you won't have to pay a single cent in capital gains tax if your rental property was actually sold for a loss.

So how much capital gains tax can you expect to pay? Depending on which country you live in, you can expect to pay anything between 10 to 30%. The good news for some is that there are actually no capital gains tax for them to worry about. This includes rental property sellers who are lucky enough to be in Hong Kong, New Zealand or Singapore.

If you are from the U.S. and hold on to your rental property for at least 1 year before selling it, your capital gains tax is will range from 10% to 25% depending on your income tax bracket.

However if you sell off your rental property after holding it for less than 1 year, your profits are considered as short term capital gains and you will be taxed more heavily at the same rate of your ordinary income tax. This will mean you can expect tax rates of 10% to 35% depending again on what is your taxable income.

How to Cut Down or Even Totally Eliminate Your Capital Gains Tax

Before selling rental property take a closer look at your country's capital gains tax laws first to see if you can spot any loopholes that you can exploit.

For example do you know that foreign property investors in the U.K. do not have to pay capital gains tax and in Russia you can avoid capital gains tax completely by owning the rental property for at least 3 years.

If you live in the U.S. , it's vital to know how the legendary 1031 exchange works so that you can milk it to legally avoid paying any money for your capital gains.

What makes the 1031 exchange so popular with rental property owner is that it allows your to defer paying your capital gains tax as long as you reinvest the money from the property sale to buy another similar type of property.

In some countries such as the U.S., home owners enjoy lower tax rates than property investors when selling off their homes. If you can find a way to qualify as a home owner instead of a rental property investor, you can enjoy these tax savings as well.

For example in the U.S. you can be considered as a home owner if you lived at least 2 of 5 years before selling off the property.You are also allowed to rent out your property for 14 days or less every year without being taxed.

Teo Zhenjie has been showing landlords how to manage their tenants and rental property effectively on Propertydo Landlord Guides. Visit his website for step-by-step real estate guides, free resources and forms.