Capital Gains Tax or Ordinary Tax When You Sell Real Estate?


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Capital gains tax is always better (ie, less) than ordinary tax. Right?

Well, the Trump Tax Plan changed a lot of things effective 1/1/2018.

The issue comes up for real estate investors who buy a property to fix n flip or simply to wholesale to another party. In other words, the whole point of the purchase is not to rent, but instead to sell to someone else for a profit.

The IRS says you are a real estate dealer with respects to that property.

Let’s say you are at the tax bracket that is just under $315K and you’re married, filing jointly. (That way you do receive the 20% income deduction easily. The income threshold amount is $315K for a married couple, filing jointly.)

At the highest tax bracket under $315K, your capital gains tax rate would be 15%. Your ordinary income tax rate is 24%.

However, with the 20% income deduction, your ordinary tax rate ends up being 19.2%. (24% x 80%).  The 80% comes from subtracting the 20% income deduction from 100%.

On the other hand, your capital gains tax would likely have the 3.8% Medicare surtax for the capital gains. That means your capital gains rate is actually 18.8% (15% + 3.8%).

Now let’s look at the real difference in tax.  You have an regular income tax rate of 19.2% versus capital gains tax of 18.8%. It really isn’t as big of a difference as it has been in the past.

There are still other tax ramifications if you’re considered a real estate dealer. That includes having self-employment tax of 15.3% assessed on your income and the fact that you have pay tax upfront if you carry paper when you sell the property. You may have to wait for the money, but the IRS says if you’re a real estate dealer, they don’t have to wait.

There are solutions for both of these issues. That’s the type of thing that we talk about in the twice monthly coaching sessions at US Tax Aid. You can learn more information at https://www.ustaxaid.com/coaching-program/.

When all is said and done, maybe falling into the real estate dealer category isn’t as bad as it used to be. With the new tax law, don’t assume the same strategies still apply. This is just one example of how we all need to change our tax strategies.

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