There are many advantages for long-term real estate capital gains. There is something to be said about generating profits from one of your investments. In addition, taxes are set up to give advantages to gains received on long-term investments.
It's Not About Quick Cash
The IRS states that if you own an investment for one year or less, that any gains are considered a short-term capital gain. If you hold it for over a year, it becomes a long-term capital gain. You only have to own the investment for a minimum of 366 days. Simple enough, right?
All you have to do is invest and forget it for a while. Set a calendar reminder to take a look at it just over a year later. Why is it preferable to have long-term gains over short-term gains? Because short-term gains are taxed at the normal, marginal income tax rate.
On the other hand, long-term gains get a lower tax rate.
Can You Time Your Gains?
The capital gain isn't taxable until you sell the investment and accumulate any gains. You decide when an investment is sold and at what year you will pay capital gains taxes. You might pay during a year when your income is down slightly because you will pay taxes at a lower rate.
Furthermore, you can use capital losses to offset gains. So, you can time your gains to sell losing investments at a time when you can get a more favorable tax rate.
What Are the Tax Rates?
Based on the American Taxpayer Relief Act of 2012, you could pay three different rates. If your income puts you below the 25 percent tax bracket, then you aren't required to pay anything on zero capital gains taxes.
If you are in the 25 percent bracket up to the highest tax bracket, then you will have a rate of 15 percent on capital gains. Then, if you make around $400,000 in adjusted gross income for a single person or $450,000 for married couples, then you pay 20 percent long-term capital gains taxes.
Of course, depending on the administration, the rates can change. So, it pays to understand the current tax rates for long-term capital gains.
You can also reinvest your capital gains to add them to your mutual fund's cost basis. This way, you can avoid any unnecessary taxes when you sell. It's easier to track when you sell a stock position and reinvest the gains into another stock. This process will not give you additional tax benefits.
But, if you reinvest into a taxable account–while buying more assets–you can accumulate wealth at a faster pace. Plus, if you hold your stocks and mutual funds in a retirement account, you are not taxed on any capital gains.
This means you can reinvest those gains in the same account without any taxes.
Capital gains are one of the benefits of investing in stocks and mutual funds. Investing in long-term capital gains is a much better strategy if you want to accrue wealth.
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