Photo – ilmungoIn any investment, there are always taxes involved. In real estate investing, one of the most important and unavoidable taxes is the Capital Gains Tax (CGT). Capital gains are a profit that a seller will earn on the sale of a non-inventory asset like that of a real estate which was bought at a much lower priced. The government will tax the investor on their profit so it is best to think of ways to lower the CGT legally.

If this is the first attempt in real estate investing, stop for a bit and remembers that anything done, when it involves money, the IRS is always lurking in the shadows. Evaluate very carefully the choices out there before settling to buy.

First step is to assess the ownership condition of the property. Tax laws will allow that if the property were going to be a primary residence then there is a chance of a tax free capital gain. Another is if there is a child in college who could become a co-owner and who can actually live in the house while going to school for a minimum of two years, then the taxes can also be lowered considerably.

Whenever there is a need for repairs, do not think DIY. Always hire a contractor and make sure that all expenses are carefully recorded. DIY is not tax deductable, however, the materials can be if insistent on this course.

Plan the sale of the property very carefully. It is important to remember and take note that the price of the sale should correspond with the ITR. Often, the capital gains tax will affect the status of the ITR based on a current income. It would be a good move to break down the income in multiple years.

Adjust the sale through cash credit. Often, there are repairs needed before the sale could be made, so if redoing the kitchen is needed to be done to sell, it has to be done. Talk to the buyer if they are willing to take cash credit instead. This will always simplify the tax liability.

There is no way to escape taxes. As the saying goes, “two things are unavoidable: death and taxes.” Thinking of trying to escape will be illegal and when caught, the money cost to clear your name and to pay for the lawyer will be considerable. Analyze the goals and make a decision intelligently.

Photo – nancyarora2020As a reaction to the economic and real estate crisis, more and more people consider short selling their properties to protect their credit ratings. The humiliating choice between short selling and being foreclosed will drive the home owner to an emergency sale. These are the unfortunate time when real estate investing can come into play as there are now opportunities to buy prime properties for a fraction of their actual price.

There is a drawback to this type of investing however. To protect the investment, get some legal advice from a knowledgeable and experienced real estate lawyer and call a competent accountant to discuss what ramifications can be faced on short sale taxes.

It is important to note that not all lenders would readily agree to a short sale and they would prefer foreclosures. However, there are too many properties now foreclosed and there are not a lot of buyers so there might be a chance that they would agree.

There is the existence of the Mortgage Forgiveness Debt Relief Act of 2007 wherein the IRS can judge that the forgiveness is actually an income on the part of the property owner and they are within their rights to tax that. There is also the fact that lenders may just run after the property owner of the balance of the money owed and paid. There are some states which can label this as a deficiency. The best thing to do would be to hire a lawyer and talk about this thoroughly.

Briefly, short selling a property does not necessarily mean that the remaining balance of the loan will not be paid. As an investor, it is best to investigate these special considerations before jumping the gun and paying for an unstable property. With potential problems the property may end up being more trouble rather than an investment.