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How the Bush Tax Cuts Affect Property Owners

If you gain income as a result of the sale of your investment property this year, you would currently pay up to 15% tax on that gain. If the Bush Tax Cuts aren’t extended past December 31, 2012, you could pay up to 20%.

In May 28, 2003, the Jobs and Growth Tax Relief Reconciliation Act of 2003, sometimes referred to as the “Bush Tax Cuts,” was signed into law. Several provisions of this law went into effect including one that reduced the tax rate on capital gains to a maximum of 15%. President Obama extended this provision for two more years with his signing of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. It is set to expire at the end of this year.

Homeowners who live in a home as their primary residence for at least 2 years can exclude the gain on their income up to a limit of $250,000, or $500,000 if the couple files jointly.

But for those who own investment property, the capital gains tax will increase. Right now if you are in the lowest two income tax brackets of 10 or 15 percent, the long-term gains are tax free. Next year if the tax cuts expire, the 10 percent bracket will collapse into the 15 percent bracket, and taxes for this bracket will go from 0 to 10 percent. For property owners in the income brackets above 15 percent, the long term capital gains tax will increase to 20 percent. (see chart below)

If you gain income as a result of the sale of your investment property this year, you would currently pay up to 15% tax on that gain

Now is the Time to Sell Investment Property

The tax cuts are set to expire at the end of this year, so many investment property owners are getting ready to sell their real estate now in case these tax cuts aren’t extended. With the upcoming election in November, there is a great deal of uncertainty as to whether the tax cuts will stay in place.  On May 10, Federal Reserve Chairman Ben S. Bernanke spoke to a group of senators warning that failure to extend the Bush Tax Cuts would hurt the economy.

Many property owners don’t want to take a chance on a decision being made in time and end up paying thousands of dollars more on gains made on the sale of their property.

If you “flip” houses, that is, buy homes, renovate them and then sell them at a profit, you may have to pay capital gains taxes under certain circumstances. If you flip a house as an investment opportunity, you will have to pay capital gains taxes. If you flip houses as your business, then these transactions will be subject to state, federal, and self-employment taxes.

Property owners need to plan now in case the tax cuts aren’t extended. Unlike stocks and other securities you can wait until the end of the year to get as much gain as possible before selling. But with assets such as a second home, more time is involved finding a buyer, striking a deal, and closing the transaction so you need to give yourself ample time to sell before the year ends. To take advantage of the lower tax rate the best time to sell an investment property is now.

Contact us at  if you have questions about selling investment property in Massachusetts or New Hampshire.

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