Over the years we are privileged to have all kinds of conversations with Littleton home owners and friends in Denver about taxes and rental properties. Sometimes it is about the capital gains they would pay or the way we might use a 1031 exchange to assist in deferring taxes on a "like-kind" exchange. Some times it is just the property taxes and how they are paid in arrears in Colorado, or even how a home buyer might increase their take home pay by reducing their withholding taxes. Yet the below is a fairly simple explanation of how a rental property is taxed when sold. For more specific guidance make sure to give us a call and we can connect you with a good CPA or maybe suggest some strategies to help you make a move into a dream home using your rental properties.
During campaign season, it is not unusual to hear a candidate criticized because they make a lot of money but pay little in income tax. While it might not seem fair, taxpayers are allowed to arrange their affairs so that they minimize the amount of tax paid.
Salary, wages and commissions, along with interest and dividends are taxed at ordinary income rates which can range from 10% to 39.6%. However, capital gains rates, for property held more than 12 months, are much lower ranging from 0% to 20%. Taxpayers in the 25-35% brackets pay LTCG rates of 15%.
The profit on rental property enjoys the lower long-term capital gains rates as compared to the profit on “flipped” property which is taxed at ordinary income rates.
Investments in rental homes generate income, provide depreciation for tax shelter, have equity build-up due to the amortizing loan, leveraged growth due to the borrowed funds and appreciation. The profits could be considerably higher than alternative investments and the profits taxed at lower rates.
The advantage is available to people who understand the tax laws and choose to arrange their activities so they pay a minimal amount of tax. The advantage is available to all taxpayers, not just the rich. In fact, implementing these types of strategies could lead to an increase in wealth.
Consider having this discussion with your tax professional.