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In real estate investing and when looking to sell your primary residence, it is important to understand the basic capital gains taxation system that may be applied to the profit generated in the sale. The IRS can potentially change these rules on a yearly basis, so it is advisable to read the information on the IRS website or to talk with a tax professional for updates prior to the sale of property. Capital gains tax refers to the taxation of a capital asset, including real estate. This tax is applied to a piece of property when the price received is greater than what was originally paid. One thing to note is that although a piece of property will increase in value while it is owned, the owner will not be assessed a capital gains tax on the property until the value is actually realized, when the piece of real estate is sold. Capital gains taxes can be considered either short-term or long-term. Short-term capital gains taxes are applied to items sold within a one-year period. In real estate, this is most commonly applied to real estate investors who are flipping properties. Short-term capital gains tax rates can be as high as 35 percent. So, when working to flip properties, it is important to take into consideration the taxes that will be applied so that you can adequately predict your profit margins on the real estate transaction. Long-term capital gains taxes are applied to sales that occur beyond one year of property ownership. The taxes for long-term capital gains will range from 10-15 percent of the realized amount (depending on your tax bracket). While these are the basic rules of capital gains taxes, in real estate there are a few loopholes. For example, if you are selling your primary residence, and you have lived in that residence for two years or more, you can take an exclusion of $250,000 on any gains that are realized from the sale if single or $500,000 if married. In order to maximize the exclusions that you are able to take, be sure to speak with a tax professional before you list or sell your property. And, as short-term capital gains taxes can significantly affect real estate investors, it is important to research and calculate the potential effect on your profit margins.
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