What Is The Current Capital Gains Tax Rate?

Capital-gains taxes are taxes you pay on profits from selling investments, like stocks, bonds, properties, cars, or businesses. The tax isn’t applied for owning these assets—it only hits when you profit from selling them.

It’s important for beginner investors to understand several factors can affect their capital-gains tax rate: how long they hold onto an investment, which asset they’re selling, how much their annual income is, as well as their marital status.

Here’s a guide on how to calculate stock profits, and below are some basic facts to know about capital gains taxes.

Capital Gains Tax Rates Today

Whether you hold onto an investment for at least a year can make a big difference in how much in taxes you pay.

When you profit from an asset after owning it for a year or less, it’s considered a short-term capital gain. If you profit from it after owning it for at least a year, it’s a long-term capital gain.

Recommended: Short-Term vs. Long-Term Investments

Short-Term Capital Gains Tax Rates

The short-term capital gains tax is taxed as regular income or at the “marginal rate,” so the rates are based on what tax bracket you’re in.

The Internal Revenue Service (IRS) changes these numbers every year in order to adjust for inflation, so investors can learn them by searching on the Internet or talking to their accountant.

Here’s a table that breaks down the short-term capital gains tax rates for the 2021-2022 tax year , or for tax returns that are filed in 2022.

Marginal Rate Income — Single Married, filing jointly
0% Up to \$9,950 Up to \$19,900
12% \$9,951 to \$40,525 \$19,901 to \$81,050
22% \$40,526 to \$86,375 \$81,051 to \$172,750
24% \$86,376 to \$164,925 \$172,751 to \$329,850
32% \$164,926 to \$209,425 \$329,851 to \$418,850
35% \$209,426 to \$523,600 \$418,851 to \$628,300
37% Over \$523,600 Over \$628,300

Long-Term Capital Gains Tax Rate By Income

Meanwhile, the long-term capital gains taxes for an individual are simpler and lower. These rates fall into three brackets: 0%, 15%, and 20%.

Here’s a table that breaks down the long-term capital-gains tax rates for the 2021-2022 tax year by income and status:

Capital Gains Tax Rate Income — Single Married, Filing Separately Head of Household Married, Filing Jointly
0% Up to \$40,400 Up to \$40,400 Up to \$54,100 Up to \$80,800
15% \$40,401 to \$445,850 \$40,401 to \$250,800 \$54,101 to \$473,750 \$80,801 to \$501,600
20% Over \$445,850 Over \$250,800 Over \$473,750 Over \$501,600

An additional 3.8% may be applied to individuals earning at least \$200,000 or married couples making at least \$250,000. This tax came into effect in 2013 in order to fund the U.S. health-insurance program known commonly as Obamacare. A higher 28% is also applied to transactions involving art, antiques, stamps, wine and precious metals.

Tips on Lowering Capital-Gains Taxes

Obviously, hanging onto an investment for over a year can significantly lower your capital-gains taxes.

Capital-gains taxes also don’t apply to so-called “tax-advantaged accounts” like 401(k) plans, IRAs, or 529 college savings accounts. So selling investments within these accounts won’t generate capital-gains taxes. Instead, 401(k)s and IRAs are taxed when you take distributions, while qualified distributions for Roth IRAs and 529s are tax-free.

Recommended: Benefits of Using a 529 College Savings Plan

Single homeowners also get a break on the first \$250,000 they make from the sale of their primary residence, which they have to live in for at least two of the past five years. The limit is twice that for a married couple.

It might also be helpful for newbie investors to know that up to \$3,000 in losses from an investment can be used to deduct taxes on your income.

How U.S. Capital Gains Taxes Compare

Generally, capital-gains tax rates affect the richest taxpayers, who make a bigger chunk of their income from profitable investments.

Here’s a closer look at how capital-gains taxes compare with other taxes, as well as investment taxes in other countries.

Comparison to Other Taxes

The maximum long-term capital gains taxes rate of 23.8% is lower than the highest marginal rate of 37%.

Proponents of the lower long-term capital-gains tax rates say the discrepancy exists in order to encourage investments as well as risk-taking. It may also prompt investors to sell their profitable investments more, rather than hanging on to them.

Comparison to Capital Gains Taxes In Other Countries

When compared with capital-gains taxes versus other countries, like the 37 in the Organization for Economic Cooperation and Development (OECD), Bloomberg News reported in 2021 that the maximum rate in the U.S. of 23.8% is roughly in the middle.

By comparison, in France, the maximum rate is at 30%. Meanwhile, Switzerland has no specific capital gains tax but taxes sales at ordinary income rates.

Comparison to Capital Gains Taxes Historically

Since short-term capital gains tax rates are the same as for wages and salaries, they adjust when ordinary income tax rates change. For instance, in 2018, tax rates went down due to the Trump Administration’s tax cuts. Therefore, so did short-term capital gains rates.

As for long-term capital gains tax, Americans today are paying rates that are relatively low historically. Today’s maximum long-term capital gains tax rate of 23.8% started in 2013, when the Obamacare 3.8% tax was added.

For comparison, the high point for long-term capital gains tax was in the 1970s, when the maximum rate was at 35%.

Going back in time, back in the 1920s, the maximum rate was around 12%. From the early 1940s to the late 1960s, the rate was around 25%. Maximum rates were also pretty high in the late 1980s and 1990s at around 28%. They then dropped between 2004 and 2012 to 15%.

What’s Tax Loss Harvesting?

Tax loss harvesting is that strategy of purposely selling some investments at a loss in order to offset the taxable profits from another investment. It’s a way to delay paying taxes, not to eliminate paying them at all.

Using short-term losses to offset short-term gains is the best way to take advantage of tax loss harvesting. This is since short-term gains are taxed at higher rates, as discussed above. IRS rules also dictate that short-term or long-term losses must be used to offset gains of the same type, unless the losses exceed the gains from the same type.

Investors can also apply investment losses of up to \$3,000 to offset income. And because tax losses don’t expire, if only a portion of losses was used to offset income in one year, the investor can “save” those losses to offset taxes in another year.

Recommended: Is Automated Tax Loss Harvesting a Good Idea?

The Takeaway

Capital-gains taxes are the levies you pay from making money on investments. The IRS updates the tax rates every year in order to adjust for inflation.

It’s important for investors to know that capital-gains tax rates can differ significantly based on whether they’ve held an investment for at least a year. An investor’s income level also determines how much they pay in capital-gains taxes.

An accountant or financial advisor can suggest ways to lower your capital gains taxes. When you open a SoFi Invest account, you’ll gain access to a team of financial advisors who can help you set financial goals and determine your risk tolerance. With as little as \$1, investors can also sign-up for Automated Investing, a robo-advisor service that automatically builds and rebalances portfolios for Members.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Everything You Need to Know About Taxes on Investment Income

Taxes on investment income can be confusing, especially since there are several ways investment income is taxed. An investor may be familiar with capital gains taxes—the taxes imposed when one sells an asset that has grown—but less clear on the implications of dividends, interest, and other ways in which investments have tax implications.

Certain types of investment vehicles—529 plans, retirement plans like 401(k)s and IRAs—are either not taxed until money is taken out of the account, or may not ever be taxed, depending on the reason and timing for taking money from the account. But general investing accounts come with tax liabilities.

Being well aware of all the tax liabilities your investments hold can minimize headaches and help you avoid a surprise bill from the IRS. Working with a professional can be helpful as an investor’s portfolio grows, or as they find themselves selling assets to fund a purchase, like the down payment on a home. But for all investors, it makes sense to familiarize yourself with the different types of taxes on investment income and some potential strategies investors use to limit taxes.

Types of Investment Income Tax

There are several types of taxes on investments. These include:

•  Dividends
•  Capital Gains
•  Interest Income
•  Interest income
•  Net Investment Income Tax (NIIT)

Taking a deeper look at each category can help you assess whether—and what—you may owe.

Tax on Dividends

Dividends are distributions that are sometimes paid to investors who hold a stock or otherwise have an interest in a partnership, trust, S-corp, or other entity taxable as a corporation. Dividends are generally paid in cash, out of profits and earnings from a corporation.

Some dividends are ordinary dividends, and are taxed at the investor’s income tax rate. Others, called qualified dividends, are typically taxed at a lower capital gains rate (more on that in the next section). Briefly, the distinction between the two is that stocks that are held for a short period of time are typically subject to a higher tax rate, while stocks held for a longer period of time are typically subject to the lower tax rate. For the full details, the IRS offers information on qualified and non-qualified dividends .

Generally, an investor should expect to receive form 1099-DIV from the corporation that paid them dividends, if the dividends amounted to more than \$10 in a given tax year.

Capital gains are the profit an investor makes between the price of an asset when purchased, versus the price of an asset when sold. Capital gains taxes are the taxes levied on the net gain between purchase price and sell price.

There are two types of capital gains taxes: Long-term capital gains and short-term capital gains. Short-term capital gains apply to investments held less than a year, and are taxed as ordinary income; long-term capital gains are held for longer than a year and are taxed at the capital-gains rate (for 2021, the
IRS rates are no higher than 15% for most individuals, \$0 if your taxable income is less than \$80,0000)

The opposite of capital gains are capital losses—when an asset loses value between purchase and sale. Sometimes, investors use losses as a way to offset tax implications of capital gains. Capital losses can also be “carried forward” to future years, which is another strategy that can help lower an overall capital gains tax.

Capital gains and capital losses only become taxable once an investor has actually sold an asset. Until you actually trigger a sale, movement in your portfolio is called unrealized gains and losses. Seeing unrealized gains in your portfolio may lead you to question when the right time is to sell, and what tax implications that sale might have. Talking through scenarios with a tax advisor may help spotlight potential avenues to mitigate tax burdens.

Taxable Interest Income

Interest income on investments are taxable at an investor’s ordinary income level. This may be money generated as interest in brokerage accounts, or interest from assets such as bonds or mutual funds. The only exception are investments in municipal (muni) bonds, which are exempted from federal taxes and may be exempt from state taxes if they are issued within the state you reside.

Interest income (including interest from your bank accounts) is reported on form 1099-INT from the IRS. Tax-exempt accounts, such as a Roth IRA or 529 plan, and tax-deferred accounts, such as a 401(k) or traditional IRA, are not subject to interest taxes.

Net Investment Income Tax (NIIT)

The Net Investment Income Tax (NIIT), now more commonly known as the “Medicare tax”, is a 3.8% flat tax rate on investment income for taxpayers whose adjusted gross income (AGI) is above a certain level—\$200,000 for single filers; \$250,000 for filers filing jointly. As per the IRS, this tax applies to investment income including, but not limited to: interest, dividends, capital gains, rental and royalty income, non-qualified annuities, and income from businesses involved in trading of financial instruments or commodities.

For taxpayers with an AGI above the required thresholds, the tax is paid on the lesser of the taxpayer’s net investment income or the amount the taxpayer’s AGI exceeds the AGI threshold.

For example, if a taxpayer makes \$150,000 in wages and earns \$100,000 in investment income, including income from rental properties, their AGI would be \$250,000. This is \$50,000 above the threshold, which means they would owe NIIT on \$50,000. To calculate the exact amount the taxpayer would owe, one would take 3.8% of \$50,000, or \$1,900.

Tax-Efficient Investing

One way to mitigate the effects of investment income is to create a set of tax efficient investing strategies. These are strategies that can minimize the tax hit that you may experience from investments and allow you to grow your wealth. These strategies can include:

•  Diversifying investments to include investments in both tax-deferred and tax-exempt accounts. An example of a tax-deferred account is a 401(k); an example of a tax-exempt account is a Roth IRA. Investing in these vehicles may be a strategy for long-term growth as well as a way to ensure that money is earmarked for certain purposes. While these are commonly thought of as retirement vehicles, there are other times when they may be tapped. For example, funds in a Roth can be used for qualified education expenses.
•  Exploring tax-efficient investments. Some examples are municipal bonds, exchange-traded funds (ETFs), treasury bonds, and stocks that do not pay dividends.
•  Considering tax implications of investment decisions. When selling assets, it can be helpful to keep tax in mind. Some investors may choose to work with a tax professional to help offset taxes in the case of major capital gains or to assess different strategies that may have a lower tax hit.

The Takeaway

SoFi Invest®, our dedicated team of financial planners is available to help members map out their financial goals. What’s more, investors can choose to take full charge of their investments—whether stocks, crypto, retirement accounts, and more—or use automated investing for a more hands-off approach.

Find out how to get started with SoFi Invest.

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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.

For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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What Are the Different Types of Taxes?

Whether you’re a newbie in the workforce or a seasoned retiree looking to do some estate planning, taxes can be complicated. With terms like “tax brackets” and “deductions,” or the differences between income vs. payroll taxes and short-term vs. long-term capital gains, you’re joining hundreds of millions of Americans who have had to figure out the confusing world of the U.S. tax code.

At a high level, taxes are involuntary fees imposed on individuals or corporations by a government entity. The collected fees are used to fund a range of government activities, including but not limited to schools, maintaining roads, health programs, as well as defense measures.

For individuals, taxes can have a profound effect on your life, influencing decisions on marriage, employment, buying a home, investing, healthcare, charity, retiring, and leaving a will. Therefore, even if you have a smart accountant, it’s important to get up to speed on the tax code.

Different Types of Taxes to Know

Here’s an incomplete but detailed look at the different types of taxes that can be levied and the ways in which they’re typically calculated and imposed.

Income Tax

The federal government collects income tax from people and businesses, based upon the amount of money that was earned during a particular year. There can also be other income taxes levied, such as state or local ones. Specifics of how to calculate this type of tax can change as tax laws do.

In the U.S, about 200 million Americans file tax forms with the Internal Revenue Service by April 15 each year. The amount of income tax owed will depend upon the person’s tax bracket and it will typically go up as a person’s income does. That’s because, in the U.S., there is a progressive tax system for federal income tax, meaning individuals who earn more are taxed more.

There are currently seven different federal tax brackets. To find out what bracket applies, a taxpayer can look at the current IRS 2021 tax bracket chart . The amount owed will also depend on filing categories like single; head of household; married, filing jointly; and married, filing separately.

Deductions and credits can help to lower the amount of income tax owed. And if a federal or state government charges you more than you actually owed, you’ll receive a tax refund.

SoFi’s Income Tax Help Center

SoFi’s 2021 income tax help center includes information about the following in order to help taxpayers:

•  How to prepare with a meeting with an accountant
•  The impact that COVID-19 could have on someone’s taxes
•  How to file for an extension and much more

Property Tax

Property taxes are charged by local governments and they are one of the costs associated with owning a home.

The amount owed varies by location and is calculated as a percentage of a property’s value. The funds typically help to fund the local government, as well as public schools, libraries, public works, parks, and so forth.

Property taxes are considered to be an ad valorem tax because they are based on the assessed value of the property.

In fact, property taxes are the most common type of an ad valorem tax. Another ad valorem application is the import duty tax where the amount due is based on the value of goods being imported from another country.

Payroll Tax

Employers withhold a percentage of money from employees’ pay and then forward those funds to the government. The amount being withheld will vary, based on a particular employee’s wages, with federal payroll taxes being used to fund Medicare and Social Security.

There are limits on the portion of income that would be taxed. For example, in 2020, a person’s income that exceeds \$137,700 is not subject to Social Security tax.

Because this tax is applied uniformly, rather than based on income throughout the system, payroll taxes are considered to be a regressive tax.

Inheritance/Estate Tax

These are actually two different types of taxes. The first—the inheritance tax—can apply in certain states when someone inherits money or property from a deceased person’s estate. The beneficiary would be responsible for paying this tax if they live in one of several different states where this tax exists AND the inheritance is large enough.

The federal government does not have an inheritance tax. Instead, there is a federal estate tax that is calculated on the deceased person’s money and property and it’s paid out from the assets of the deceased before anything is distributed to their beneficiaries.

There can be exemptions to these taxes and, in general, people who inherit from someone they aren’t related to can anticipate higher rates of tax.

Regressive, Progressive, and Proportional Taxes

These are the three main categories of tax structures in the U.S. (two of which have already been referenced in this post).

Here are definitions that include how they impact people with varying levels of income.

What’s a Regressive Tax?

Because this tax is uniformly applied, regardless of income, it takes a bigger percentage from people who earn less and a smaller percentage from people who earn more.

As a high-level example, a \$500 tax would be 1% of someone’s income if they earned \$50,000; it would only be half of one percent if someone earned \$100,000, and so on. Examples of regressive taxes include state sales taxes and user fees.

What’s a Progressive Tax?

This kind of tax works differently, with people who are earning more money having a higher rate of taxation. In other words, this tax (such as an income tax) is based on income.

This system is designed to allow people who have a lower income to have enough money for cost of living expenses.

What’s Proportional Tax?

This is another way of saying “flat tax.” No matter what someone’s income might be, they would pay the same proportion. This is a form of a regressive tax and proportional taxes are more common at the state level and less common at the federal level.

Capital Gains Tax

Next up: capital gains tax that an investor may be responsible for paying when having stocks in an investment portfolio. This can happen, for example, if they sell a stock that has appreciated in value over the purchase price.

The difference in the increased value from purchase to sale is called “capital gains” and, typically, there would be a capital gains tax levied.

An exception can be when an investor sells increased-in-value stocks through a tax-deferred retirement investment inside of the account. Meanwhile, dividends are taxed as income, not as capital gains.

It’s also important for investors to know the difference between short-term and long-term capital gains taxes. In the U.S. tax code, short-term is one year or less, while long-term is anything longer. In 2020, the federal tax rate on gains made by short-term investments ranged from 10% to 37%. For long-term investment gains, it was significantly lower at either 0%, 15% or 20%.

Tips For Tax-Efficient Investing

Tips for tax efficient investing can include to select certain investment vehicles, such as:

•  Exchange-traded funds (ETFs): These are baskets of securities that trade like a stock. They’re tax efficient because they typically track an underlying index, meaning that while they allow investors to have broad exposure, individual securities are bought and sold less frequently, creating fewer events that will likely result in capital gains taxes.
•  Index mutual funds: These tend to be more tax efficient than actively managed funds for reasons similar to ETFs.
•  Treasury bonds: There are no state income taxes levied on earned interest.
•  Municipal bonds: Interest, in general, is exempted from federal taxes; if the investor lives within the municipality where these local government bonds are issued, they can typically be exempt from state and local taxes, as well.

VAT Consumption Tax

In the U.S., we pay a regressive form of tax, a sales tax, on many items that are purchased. In Europe, the system works differently. A VAT tax is a form of consumption tax that’s due upon a purchase, calculated on the difference between the sales price and what it cost to create that product or service. In other words, it’s based on the item’s added value.

Here’s one big difference between a sales tax and a VAT tax: the first is charged at the final part of the sales transaction. VAT, on the other hand, is calculated throughout each supply chain step and then built into the final purchase price.

This leads to another difference. Sales taxes are added onto the purchase price that’s listed; VAT contains those fees within the price and so nothing extra is added onto the price tag that a buyer would see.

The Takeaway

This isn’t a comprehensive list of all tax types but hopefully it provides a broad answer to questions like “What is a tax?” and “What types of taxes are there?” And hopefully it demystifies some questions you might have had about all the different tax items on a receipt or paystub.

SoFi Money is a cash management account that can be set up for direct deposits, which can include your income tax refund. When filing tax forms, you’ll just need to indicate where you want the refund to go.

Setting up a direct deposit for payroll is also easy. You just download and sign a pre-filled form and then give it to your employee’s human resources department. Then, watch for the direct deposit to come into your SoFi Money account. This can take two to four weeks.

Set up direct deposit with SoFi Money today.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).

2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.

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For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
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Why Dividends Are Important to the Portfolio of Every Investor

As you start to get your feet wet in the figurative pool that is the stock market, you’ll hear the word “dividends” over and over again.

You often hear that dividends are important, dividends are income, and dividends should be a part of every investor’s portfolio. But what exactly are dividends? How is income generated through them? And are they truly important for every investor?

Dividends are an important concept in stock market investing. They’re so important that some investors center their entire portfolios around them, only purchasing stocks that not only pay higher-than-average dividends. But they have their limitations too.

What Are Dividends?

Dividends are a form of income generated from investing in publicly traded companies. This income is actually a portion of the profits generated by the company that you invest in.

At the end of each quarter, when a publicly traded company that pays dividends calculates the amount of profits they made in the quarter, some of those profits are set aside as a way to return value to its shareholders.

Publicly traded companies must declare dividends before they are paid. This means that the company must publicly say that it will pay dividends to its investors. These declarations create a legal obligation for the companies to pay the predetermined amounts to their investors. If there is no declaration of dividends, there simply won’t be any paid.

When dividends are declared, the amount to be paid will be explained in numeric dollar value. This means that the publicly traded company tells investors that it will pay a predetermined amount of dividends.

For example, if XYZ Incorporated declares to investors that it will pay a \$0.50 quarterly dividend for the next calendar year, that means that investors will receive a \$0.50 cash payment for every share of XYZ Incorporated stock they own every three months for the next year.

It’s also important to consider the ex-dividend date if you are planning on purchasing a stock for coming dividends. The ex-dividend date of a stock is the cut-off for inclusion in its next dividend payment. The day before the ex-dividend date is the last day you can purchase shares to be eligible for the next dividend payment. Shares purchased on or after the ex-dividend date will not take part in the next dividend payment.

Pro tip: You can earn a free share of stock (up to \$200 value) when you open a new trading account from Robinhood. With Robinhood, you can customize your portfolio with stocks and ETFs, plus you can invest in fractional shares.

How Your Portion of Dividends Is Calculated

Dividends are paid equally on a per-share basis, no matter what the declared dividend is. For example, let’s say XYZ Company declared a quarterly dividend of \$0.50 per share and there are currently 500 million outstanding shares of the company. This would make the total dividend payment to shareholders \$250 million per quarter.

So, if you own 100 shares of XYZ Company, you will receive a payment of \$50 every three months — the \$0.50 dividend per share times your 100 shares.

Dividend Investing Pros and Cons

Dividend investing has been a popular strategy for many years. It’s the buy-and-hold strategy your grandfather told you about when he gave you your birthday check. In many ways, dividend investing has been the darling of the retirement-investing community due to reliable movement in the market combined with decent income.

Nonetheless, although there are plenty of reasons to be excited about the dividend investing strategy, there are also plenty of drawbacks that should be considered if this is the route you think you’re going to take.

Pros of Dividend Investing

As mentioned above, dividend investing has been the darling of retirement savers for years, and for good reason. Some of the most important benefits to consider if you plan on chasing down dividends include:

1. Dividends Can Offer Tax Advantages

Income from investing is still income. In the United States, no matter how income is derived, it’s taxed. These tax dollars keep our roads paved, schools open, and the basic government services that provide the foundation of the great country that the United States has become.

Nonetheless, nobody wants to pay more than their fair share, and when there’s an opportunity to reduce your tax burden, it’s well worth taking it. Dividend investing is one of those opportunities.

Income earned in the stock market is subject to the capital gains tax. How you invest determines the rate you pay in capital gains taxes. For example, profits from investments held for less than one year are taxed at your ordinary income tax rate. So, for example, if you earn between \$85,526 and \$163,300 in 2020, your tax rate will be about 24%, both on your income and your capital gains on investments held for less than one year.

Once investments are held for a year or longer, profits from these investments are taxed at the capital gains tax rate. The maximum capital gains rate is just 15%. If you make less than \$78,750 per year, your capital gains tax rate is 0%.

In terms of dividend investments, there are two major tax advantages:

• Long-Term Style. Dividend investing is a long-term style of investing. As such, it’s natural to hold a strong dividend stock for well more than one year. This means that, when you do eventually sell shares, your gains will be taxed at the capital gains rate rather than your current income tax rate, offering a steep discount from Uncle Sam.
• Dividend Taxes. Dividends paid on stocks purchased after the ex-dividend date are taxed at your ordinary income tax rate. However, if you own the stock for 60 days or longer and the stock was purchased prior to the ex-dividend date, the dividend payments become qualified dividends. Qualified dividends are taxed at capital gains rates, offering up the same steep discount that you experience with profits from long-term investments.

2. Dividends Increase the Rate of Compound Gains

Your ultimate goal in investing is to build your wealth, regardless of your current level of wealth. Dividends are a great help with that. In fact, Grace Groner was an average American who invested her way to millions. A major part of the strategy that led to her amassing a multimillion-dollar fortune was dividend reinvestments, which gave Groner the ability to exaggerate the most powerful force in the stock market: compound gains.

When you earn dividends on an investment, you can use those dividend payments to purchase more shares. Those additional shares begin earning dividends too. The money earned through dividends that have been reinvested is a perfect example of the power of compound gains, and they shouldn’t be discounted.

Over the course of the life of your investment portfolio, compound gains can add hundreds of thousands or even millions of dollars to your overall portfolio value, depending on the size of your portfolio. By reinvesting your dividends, you add fuel to the compound-gains fire.

Pro tip: If you’re going to add new investments to your portfolio, make sure you choose the best possible companies. Stock screeners like Stock Rover can help you narrow down the choices to companies that meet your requirements. Learn more about our favorite stock screeners.

3. Dividends Provide Stable Income

As you near retirement or enter into the golden years, stable income becomes important. After all, you want to make sure that your retirement is a comfortable one that gives you the ability to budget for the lifestyle you enjoy.

Dividends help many to achieve that goal.

While \$0.50 per share doesn’t sound like a lot of money, if you invest for your retirement and amass 100,000 shares of a stock that pays \$0.50 per share quarterly, you’ll receive a payment of \$50,000 every three months.

That works out to \$200,000 per year in stable income. According to The Week, only the top 5% of income earners in the United States earn \$200,000 per year or more. So, over the long run, investing in dividend stocks for your retirement could lead to golden years built on an extremely sturdy financial foundation.

Cons of Dividend Investing

There are plenty of reasons to consider adding dividend investments to your portfolio. On the other hand, there is no such thing as the perfect investment. Every rose has its thorns, just like every investment has its drawbacks. The most important drawbacks to consider if you’re thinking about taking a dividend-based approach to investing include:

1. High Dividends Generally Mean Slow Growth

Buying stocks that pay high dividends puts you in a bit of a give-and-take situation. Stocks that pay dividends are generally well-established companies with the ability to foresee revenue and earnings well into the future. Of course, the market knows this, and prices it in when determining the value of the stock.

With this relatively stable view of what these companies are going to be doing ahead, these stocks aren’t going to see much momentum. Instead, they tend to see slow, steady growth over a long period of time.

So, while you get to take dividends into account, you have to be willing to give up the potential for the momentous upside that investors dream about.

2. Dividends Can Be Reduced or Eliminated

Dividend investing is often looked at as a low-risk strategy. As a result, many make the mistake of buying dividend stocks and not looking back at them for a year or longer. The problem is that, like valuations, dividends can change.

If a publicly traded company that pays great dividends sees headwinds ahead in its sector, the company’s management may decide to keep more of their profits in house in an effort to weather the storm. Instead of cutting costs by reducing the number of employees or closing facilities, a company will generally opt to cut dividends first.

As a result, it’s not rare to see reductions or complete eliminations of dividend payments over time. Investors who fail to keep tabs on the dividends they’re being paid and the valuations of the stocks they’re invested in at least quarterly can end up in what they believe are stable income investments that aren’t actually producing any income.

3. Not Enough Options for Adequate Diversification

Not all stocks pay dividends. Those that do decide what percentage of their profits they’re going to give back to investors, meaning that companies that do pay dividends will not all pay dividends equally.

As you start to look for stocks that pay high dividends, you’ll find that they are nestled in a couple of sectors — such as utilities, energy, and consumer staples — with a handful of stocks in each of these sectors being the strongest options for income investments.

The problem here is that the limited number of companies offer compelling dividends also limits your ability to diversify. Diversification is an important aspect of your investment portfolio because it protects you from the risk of significant losses. With fewer options in the high-dividend stocks arena, many experts argue that proper diversification is difficult to do if you have a portfolio that’s 100% focused on chasing down dividends.

Final Word

No matter what your age, your appetite for risk, or your portfolio goals, high-dividend stocks should be included somewhere in your portfolio. These stocks can act as hedges against higher-risk bets within your portfolio, or take center stage as buy-and-hold opportunities that offer income to boot.

However, there is no type of stock in which all opportunities within the market are created equal. It is vital to take the time to research the underlying companies represented by the investments you make, regardless of whether you’re investing in high-dividend stocks or some other opportunity in the stock market.

Source: moneycrashers.com

How Much Is Capital Gains Tax on Real Estate? Plus: How To Avoid It

Capital gains tax is the income tax you pay on gains from selling capital assets—including real estate. So if you have sold or are selling a house, what does this mean for you?

If you sell your home for more than what you paid for it, that’s good news. The downside, however, is that you probably have a capital gain. And you may have to pay taxes on your capital gain in the form of capital gains tax.

Just as you pay income tax and sales tax, gains from your home sale are subject to taxation.

Complicating matters is the Tax Cuts and Jobs Act, which took effect in 2018 and changed the rules somewhat. Here’s what you need to know about all things capital gains.

What is capital gains tax—and who pays it?

In a nutshell, capital gains tax is a tax levied on possessions and property—including your home—that you sell for a profit.

If you sell it in one year or less, you have a short-term capital gain.

If you sell the home after you hold it for longer than one year, you have a long-term capital gain. Unlike short-term gains, long-term gains are subject to preferential capital gains tax rates.

What about the primary residence tax exemption?

Unlike other investments, home sale profits benefit from capital gains exemptions that you might qualify for under some conditions, says Kyle White, an agent with Re/Max Advantage Plus in Minneapolis–St. Paul.

The IRS gives each person, no matter how much that person earns, a \$250,000 tax-free exemption on capital gains from a primary residence. You can exclude this capital gain from your income permanently.

“So if you and your spouse buy your home for \$100,000, and years later sell for up to \$600,000, you won’t owe any capital gains tax,” says New York attorney Anthony S. Park. However, you do have to meet specific requirements to claim this capital gains exemption:

• The home must be your primary residence.
• You must have owned it for at least two years.
• You must have lived in it for at least two of the past five years.
• You cannot have taken this exclusion in the past two years.

If you don’t meet all of these requirements, you may be able to take a partial exclusion for capital gains tax if you meet certain exceptions (e.g., if your job forces you to move before you live in the home two years). For more information, consult a tax adviser or IRS Publication 523.

What’s my capital gains tax rate?

For capital gains over that \$250,000-per-person exemption, just how much tax will Uncle Sam take out of your long-term real estate sale? Under the new tax law, long-term capital gains tax rates are based on your income (pre-2018 it was based on tax brackets), explains Park.

Let’s break it down.

For single folks, you can benefit from the 0% capital gains rate if you have an income below \$40,000 in 2020. Most single people will fall into the 15% capital gains rate, which applies to incomes between \$40,001 and \$441,500. Single filers with incomes more than \$441,500, will get hit with a 20% long-term capital gains rate.

The brackets are a little bigger for married couples filing jointly, but most will get hit with the marriage tax penalty here. Married couples with incomes of \$80,000 or less remain in the 0% bracket, which is great news. However, married couples who earn between \$80,001 and \$496,600 will have a capital gains rate of 15%. Those with incomes above \$496,600 will find themselves getting hit with a 20% long-term capital gains rate.

• Your tax rate is 0% on long-term capital gains if you’re a single filer earning less than \$40,000, married filing jointly earning less than \$80,000, or head of household earning less than \$53,600.
• Your tax rate is 15% on long-term capital gains if you’re a single filer earning between \$40,000 and \$441,500, married filing jointly earning between \$80,001 and \$486,600, or head of household earning between \$53,601 and \$469,050.
• Your tax rate is 20% on long-term capital gains if you’re a single filer, married filing jointly, or head of household earning more than \$496,600. For those earning above \$496,600, the rate tops out at 20%, says Park.

Don’t forget, your state may have its own tax on income from capital gains. And very high-income taxpayers may pay a higher effective tax rate because of an additional 3.8% net investment income tax.

If you held the property for one year or less, it’s a short-term gain. You pay ordinary income tax rates on your short-term capital gains. That’s the same income tax rates you would pay on other ordinary income such as wages.

Do home improvements reduce tax on capital gains?

You can also reduce the amount of capital gains subject to capital gains tax by the cost of home improvements you’ve made. You can add the amount of money you spent on any home improvements—such as replacing the roof, building a deck, replacing the flooring, or finishing a basement—to the initial price of your home to give you the adjusted cost basis. The higher your adjusted cost basis, the lower your capital gain when you sell the home.

For example: if you purchased your home for \$200,000 in 1990 and sold it for \$550,000, but over the past three decades have spent \$100,000 on home improvements. That \$100,000 would be subtracted from the sales price of your home this year. Instead of owing capital gains taxes on the \$350,000 profit from the sale, you would owe taxes on \$250,000. In that case, you’d meet the requirements for a capital gains tax exclusion and owe nothing.

Take-home lesson: Make sure to save receipts of any renovations, since they can help reduce your taxable income when you sell your home. However, keep in mind that these must be home improvements. You can’t take a deduction from income for ordinary repairs and maintenance on your house.

How the tax on capital gains works for inherited homes

What if you’re selling a home you’ve inherited from family members who’ve died? The IRS also gives a “free step-up in basis” when you inherit a family house. But what does that mean?

Let’s say Mom and Dad bought the family home years ago for \$100,000, and it’s worth \$1 million when it’s left to you. When you sell, your purchase price (or “basis”) is not the \$100,000 your folks paid, but instead the \$1 million it’s worth on the last parent’s date of death.

You pay capital gains tax only on the difference between what you sell the house for, and the amount it was worth when your last parent died.

What if I have a loss from selling real estate?

If you sell your personal residence for less money than you paid for it, you can’t take a deduction for the capital loss. It’s considered to be a personal loss, and a capital loss from the sale of your residence does not reduce your income subject to tax.

If you sell other real estate at a loss, however, you can take a tax loss on your income tax return. The amount of loss you can use to offset other taxable income in one year may be limited.

How to avoid capital gains tax as a real estate investor

If the home you’re selling is not your primary residence but rather an investment property you’ve flipped or rented out, avoiding capital gains tax is a bit more complicated. But it’s still possible. The best way to avoid a capital gains tax if you’re an investor is by swapping “like-kind” properties with a 1031 exchange. This allows you to sell your property and buy another one without recognizing any potential gain in the tax year of sale.

“In essence, you’re swapping one investment asset for another,” says Re/Max Advantage Plus’ White. He cautions, however, that there are very strict rules regarding timelines and guidelines with this transaction, so be sure to check them with an accountant.

If you’re opting out of the rental property investment business and putting your money in another venture that does not qualify for the 1031 exchange, then you’ll owe the capital gains tax on the profit.

Source: realtor.com

What Is a 1031 Exchange – Defer Taxes on Like-Kind Real Estate

When you hold an asset such as an investment property for longer than one year and sell it for a profit, you pay capital gains taxes on that profit.

Maybe. Or maybe not, if you use tax loopholes like a 1031 exchange to postpone paying capital taxes indefinitely.

In fact, many real estate investors use 1031 exchanges to continually roll profits from each property into ever-larger income properties, never paying a cent in capital gains taxes until the day they decide to sell off their portfolio. A day that never comes for some lifelong investors.

As you explore ways to lower your taxes as a real estate investor, add 1031 exchanges to your tax-shrinking toolkit.

What Is a 1031 Exchange?

Not-so-creatively named after the section of U.S. tax code that details it, 1031 exchanges allow investors to “swap” one property for a similar property without paying capital gains taxes on the sold property. It initially applied when two parties swapped properties with one another, but nowadays 1031 exchanges are mostly used when investors sell off a property then use the proceeds to buy another from a different seller.

Investors defer or postpone paying capital gains taxes until they sell a property without buying a new replacement property.

Historically, citizens could perform a like-kind exchange on any type of personal property, such as franchise licenses, aircraft, and equipment. However that changed under the Tax Cuts and Jobs Act of 2017, which no longer allows 1031 exchanges for personal property. Only real estate qualifies under the new tax rules.

The Real Estate Strategy Behind 1031 Exchanges

When you first start investing in real estate, you probably don’t have much cash. You might buy a small rental property that generates \$150 a month, and set about saving up more money.

After a few years, you’ve saved up more cash and built some equity in your rental property. You decide to upgrade to a three-unit property that generates \$500 per month.

So you sell your single-family rental, and combine the proceeds with your savings to buy the new three-unit property. With a 1031 exchange, you defer paying capital gains taxes on your profits from selling the single-family rental.

A few years later, you repeat the process, selling the three-unit property and buying a six-unit property that cash flows \$1,000 per month. Again, you defer paying capital gains taxes on the three-unit building you sold by using a 1031 exchange to roll the profits into the new purchase.

Then you do it again to buy a 15-unit apartment building that generates \$2,500 per month. Then a 30-unit complex, then a 50-unit complex, and then you retire with \$15,000 per month in net rental income.

In short, you keep snowballing the profits of your real estate to trade up to ever-larger buildings with greater cash flow. All without paying a dime in capital gains taxes as you upgrade from one property to the next.

Pro tip: Have you been thinking about purchase a rental property? Roofstock gives you the ability to purchase turnkey properties all over the United States. Learn more about Roofstock.

1031 Exchange Requirements

To qualify for a 1031 exchange, both you and your real estate deal have to meet certain criteria. That criteria starts with the simple rule that investments must be “like-kind,” meaning both properties involved must be investment properties.

Keep the following in mind before you commit to any 1031 exchange plans.

Available to Investors Only — Not Homeowners

Like-kind exchanges are not available to homeowners, only to real estate investors.

Before you cry foul about how real estate investors get unfair tax breaks, this rule exists for a good reason: homeowners don’t need it. They already benefit from the homeowner exclusion, which exempts them from paying capital gains taxes on the first \$250,000 of profits (\$500,000 for married couples) when selling their home.

In other words, most homeowners don’t pay capital gains taxes when they sell their home anyway.

Equal or Greater Value

To capitalize on the 1031 exchange tax break, the new property you buy must cost at least as much as the property you sold. Otherwise, investors could scale down their portfolios without paying taxes either.

If you buy a replacement property at a lower price, you get taxed on the difference in value. More on taxable “boot” shortly.

Applies to Income Properties, Not Flips

The 1031 exchange was designed for long-term investments, not rapid house flipping. Specifically, the IRS rules state that you can’t exchange properties “held primarily for resale.”

Like-kind exchanges help you postpone or avoid long-term capital gains taxes — which apply to assets held for at least a year — not regular income taxes on short-term profits. If you want to use a 1031 exchange, hold your property for at least a year before selling it.

Time Limits

There are two time limits you need to remember when doing a 1031 exchange.

After you sell your old property, you have 45 days to declare a new replacement property. Known as the 45-day rule, you have to submit the details about your upcoming property purchase to a qualified intermediary (middleman — more on that shortly). The IRS does recognize that sometimes deals fall through however, so they allow you to specify up to three potential properties.

This raises the second time-based rule: the 180-day rule. You have up to 180 days to settle on the new property after you sell your original property.

Note that the clock starts ticking on both time requirements from the day that you close on selling your first property. The 180-day rule starts then, not when you declare your new property or submit your property options, as the case may be.

Qualified Intermediary Must Hold Funds

When you do a 1031 exchange, you can’t touch the profits from the relinquished property. You need to pay a disinterested third party — a qualified intermediary — to hold the money for you in escrow between when you sell one property and buy another.

In fact, the qualified intermediary must actually buy the new property on your behalf, and then transfer the deed to you afterward. There are no licensing requirements to become a qualified intermediary, but you can’t use a parent, child, spouse, or sibling. You also can’t use someone already serving as your “agent,” such as your real estate agent, accountant, or attorney.

Some banks, such as Wells Fargo, offer to serve as a qualified intermediary on your behalf, but beware they charge a fee.

Boot, Debt, and Cash

If you have cash left over from the sale of your old property that doesn’t go toward buying the new property, the qualified intermediary returns it to you 180 days after you closed on selling the old property. Known as “boot” based on the old English word meaning “something in addition to” — today rarely used outside the expression “to boot” — the IRS taxes this surplus cash as capital gains.

Straightforward enough. But beware that boot covers not only the cash you receive, but the difference in debt levels.

Say you sell a property for \$300,000, of which \$200,000 goes toward paying off a mortgage, and the other \$100,000 goes to the qualified intermediary to help fund the replacement property (ignoring closing costs for simplicity). The boot principle applies not just to the \$100,000 in cash, but also to the \$200,000 in debt.

Remember, to avoid capital gains taxes on the sold property, you need to buy a replacement property of equal or greater value. You can’t go out and buy a property for \$100,000 just because that’s your cash payout after selling the old property. Or rather, you could, but you’d still owe Uncle Sam capital gains taxes.

To avoid any capital gains taxes, the new property must cost you at least what you sold the old property for — in this case, \$300,000.

How Depreciation Fits In

Real estate investors can depreciate the cost of the building and some closing costs for the first 27.5 years they own a property. In other words, depreciation refers to a tax deduction that the taxpayer spreads over multiple years rather than taking all at once. They can also depreciate the cost of any capital improvements, although the period varies.

When investors sell a property, they have to effectively pay the IRS back for the depreciation deductions they took. Known as depreciation recapture, the IRS taxes you at your regular income tax rate for it.

Fortunately, you can dodge depreciation recapture just like capital gains taxes using a 1031 exchange. That is, if you swap two like-kind properties that both have buildings on them. If you buy a piece of raw land with no building on it, you still owe depreciation recapture because it’s the building that’s depreciated. Speak with a tax professional because these quirks can quickly cause confusion and tax errors.

1031 Exchanges and Personal Use Properties

The IRS makes it clear: 1031 exchanges exist for investment properties, not personal residences. Still, the real world is a messy place, and sometimes property owners change the use of their properties.

Converting a Second Home Into a Vacation Rental

Imagine a scenario where you own a vacation home, and aren’t particularly interested in paying capital gains taxes upon selling it. So you start renting it on Airbnb as a vacation rental.

The IRS allows you to use a 1031 exchange to defer capital gains taxes when you sell it, if you meet two conditions:

1. For each of the last two years (measured as 12-month periods, not calendar years), the property was rented at fair market pricing for 14 or more days, and
2. You limited your own personal use of the property to the greater of 14 days or 10% of the number of days that it was rented at fair market pricing within each 12-month period.

Note that you must use the property primarily as a rental for at least two years before you can do a 1031 exchange on it.

Converting a Rental Into Your Residence

The reverse also holds true if you want to convert the new property into your primary residence in order to take advantage of the \$500,000 homeowner exclusion.

After you perform a 1031 exchange to swap one investment property for another, you can’t move into the new property for at least two years. Specifically, the property must be fair-market rented for at least 14 days in each of those two years, and you can’t use the property yourself for more than 14 days in each of those years or 10% of the days it was rented.

If you wait those two years and use the property as a rental, you can then move in, but you must live there yourself for at least two years before you can take advantage of the primary residence exclusion. So yes, you can theoretically roll your capital gains into an eventual residence and dodge the first \$500,000 in taxes on them, but it involves a lengthy multi-step process to pull off.

Does a 1031 Exchange Make Sense for You?

Deferred exchanges work marvelously for a specific type of investor looking to roll their gains into ever-larger properties with greater cash flow. Even if you fit that description, however, they don’t always make sense.

First, it could be unnecessary. If you take capital losses elsewhere one year, they offset your capital gains. For example, say you sell some stocks for a \$30,000 loss, and you sell your rental property for a \$35,000 gain. The IRS would only hit you with capital gains taxes on the net gain of \$5,000 — hardly a tax scenario to spill tears over.

For that matter, you can actively harvest losses to offset your capital gains.

You should also consider your own cash needs. Sure, it’d be nice to avoid capital gains taxes, but if you need the money for another use rather than buying a new investment property, that could take precedence.

For instance, say you sell a property for a \$35,000 gain, but you incur \$20,000 in medical expenses. Or you desperately need a new roof, or you need to pay off your degenerate brother-in-law’s debts to the mob so he doesn’t swim with the fishes. You get the idea: tax optimization is great, but only to the extent that it fits with your other financial needs.

Final Word

As real estate tax perks go, 1031 exchanges fall on the more complex end of the spectrum. Don’t approach them cavalierly, and speak with a financial professional before attempting your first one.

Still, they offer a fantastic opportunity to scale your investment portfolio without having to pay capital gains taxes along the way. If you hope to generate ever-growing income from real estate investments, consider swapping out your lesser cash-flowing properties for greater ones and deferring capital gains taxes for another day.

Source: moneycrashers.com

Political Power Shift Could Generate Changes in the U.S. Luxury Housing Market

There’s a new political party in charge in Washington, D.C., one that hopes to make some big changes in the U.S. economy, including tax reform. While the initial priorities of the Biden administration and Congress focus on mitigating the devastating impact of the pandemic, the new political dynamic could eventually create a shift in the luxury housing market.

“The luxury market has done very well in recent years thanks to low mortgage rates and to the performance of the stock market, which is influenced by politics,” said Danielle Hale, chief economist for realtor.com in Washington, D.C.

Political actions have both a direct and an indirect impact on the housing market.

“We’ve never been at a time when the political landscape has continued to seem so uncertain,” said Frederick Peters, CEO of Warburg Realty in New York City. “Politics has an effect on the stock market, which in turn has an effect on the luxury real estate market.”

While most of the Biden administration’s initial housing policies focus on the affordable housing crisis, Marco Rufo, a partner with The Agency real estate brokerage in Los Angeles, said that the possible extension of the federal eviction moratorium beyond the current date of March 31 could have implications for the higher end of the housing market in the future.

“Most of our buyers are extremely wealthy and many of them own lots of property that they rent to tenants,” Mr. Rufo said. “If policies are put in place that reduce their ability to collect rent on multiple properties, that could have a negative impact on their net worth and willingness to upgrade into more expensive properties.”

Another political issue that’s already had a major effect on luxury housing markets is tax reform.

Tax Reform and the Luxury Residential Market

The Tax Cuts and Jobs Act that went into effect in 2018 has several provisions, such as lower tax rates, a higher lifetime estate and gift tax limit, and a higher standard deduction that are set to expire at the end of 2025. Democrats are anticipated to address those expiring provisions and other tax issues eventually.

“Most of the tax reform ideas impact people with incomes above \$400,000 and capital gains of more than \$1 million, the demographic that matches our homebuyers,” Mr. Rufo said. “If everything was enacted, it probably wouldn’t mean that people won’t buy homes, but it could mean that they pause a little to consider their options.”

Some potential tax reforms include:

· Lifting SALT deduction limitations. The 2018 limitation on the deductibility of state and local taxes (SALT) to \$10,000 was significant in markets like New York and California, said Mr. Peters, who anticipates a positive impact on those tax-heavy locales if that limit is lifted by Democratic tax reform efforts.

“It’s not just a matter of money and getting a larger tax deduction, it’s also the perception,” he said. “It would make people feel less anxious about buying in states with higher taxes.”

In the Washington, D.C. area, where the luxury market mostly centers on homes priced between \$1.5 million and \$2.5 million, the SALT deductibility cap slowed the pace of sales, reduced luxury listings and reduced home buyers’ budgets, said Jeff Detwiler, president and CEO of Long & Foster Real Estate in D.C.

“We saw \$2 million homes sit on the market for a year or longer,” he said. “Now we have only a two-month supply of luxury homes because of migration trends and a frothy market in 2020. If the SALT cap is lifted, we’d see even more demand because those deductions directly impact the finances of our buyers.”

Migration trends after the SALT cap meant that more people left high-tax states to move to lower tax states like Florida and Texas.

“If your SALT deductions aren’t limited, then you can be agnostic over where you live,” said Melissa Cohn, executive mortgage banker with William Raveis Mortgage in New York City.

· Higher income tax rates. Increasing income taxes always has a negative impact on the luxury market, Ms. Cohn said. However, she doesn’t expect tax rates to rise in the near future.

“The pandemic changed everything, and the focus now is on rebuilding the economy. So even if the Democrats want to raise taxes eventually, now is not the time,” she said.

An increase in tax rates for high earners probably won’t take buyers out of the market, said Mr. Detwiler, but it could reduce their price point by several hundred thousands dollars or more.

“The good news about tax reform that would cause wealthier people to pay more is that it would be a federal issue that people can’t escape by moving to Florida,” Mr. Peters said.

· Higher capital gains tax rate. While home sellers can exclude up to \$250,000 in profit if they’re single and up to \$500,000 if they’re married from a capital gains tax on their primary residence, an increase in the long-term capital gains tax rate could still hurt the luxury housing market. Currently, the highest capital gains tax rate is 20%.

“If the capital gains tax rate is increased, that could have negative repercussions,” Ms. Cohn said. “People wouldn’t want to sell their homes, especially if they hoped the rates would roll back again in the future, and that would limit the supply of homes.”

Mr. Detwiler said he thinks a higher capital gains rate could have a bigger impact on the second-home market. Currently, the long-term capital gains tax rate depends on your income and is either 0%, 15% or 20%. Single taxpayers who earn \$441,450 or more and married taxpayers who earn \$496,600 pay the top rate.

“Sellers have to pay capital gains taxes on the profit of the sale of a home that’s not their primary residence,” Mr. Detwiler said “In addition, if people have to pay more taxes on other gains, that shrinks their portfolio and changes how much they’ll want to pay for a house.”

· Elimination of 1031 Exchange option. A 1031 Exchange allows investors to swap one property for another and postpone paying capital gains tax on the sale until you sell the next property.

Without the 1031 Exchange, investors would have less money to put into their next deal, Ms. Cohn said.

“Getting rid of the 1031 Exchange would have a direct impact in our area because we have a lot of luxury rentals at \$40,000 to \$50,000 a month in Los Angeles,” Mr. Rufo said. “Owners of these properties would pull back from buying and selling them if they had to pay capital gains on the transaction, and that would have a direct impact on property values.”

Broader Impact of Politics on the Housing Market

Real estate market performance is tied to the fundamentals of supply and demand, which can also be influenced by political policies, realtor.com’s Ms. Hale said. (Mansion Global is owned by Dow Jones. Both Dow Jones and realtor.com are owned by News Corp.)

“Demand is based on income and consumer confidence,” Ms. Hale said. “If wealthy households see their income go down due to a higher tax burden, it’s conceivable that their spending could decline and that would impact the housing market.”

However, a growing economy, especially one that drives stock gains, could mean after-tax incomes are higher for wealthy households, she said.

“The way politics matters the most is how it makes people feel,” Mr. Peters said. “As real estate agents, we’re selling people a belief in their future. That’s a lot harder to do when people feel freaked out by the present. They’re less likely to take on large financial commitments when they’re concerned about the future.”

Personally, Mr. Peters is optimistic about the impact of the new power configuration for his market in New York.

“It’s not entirely irrelevant that the new Senate majority leader [Charles Schumer] is from New York,” he said.

Source: realtor.com

Investment Property: How Much Can You Write Off on Your Taxes?

Learn how to navigate the tricky tax laws around investment properties, including ways to save.

There are certain things you can do as a real estate investor to help manage your tax bill and maximize your after-tax return on investment. To do so, however, you need to understand the primary ways in which investment real estate portfolios get taxed. You must also have a general grasp of some abstract concepts like calculating your tax basis, as well as the depreciation of capital investments.

Taxation of rental income

The IRS taxes the real estate portfolios of living investors in two primary ways: income tax and capital gains tax. (A third way, estate tax, applies only to dead investors.)

Rental income is taxable — as ordinary income tax. That means you must declare it as income on your tax return and pay income tax on it. Unlike wages, rental income is not subject to FICA taxes.

Your income is everything you get from rents and royalties on the property, minus any deductible expenses. You can’t deduct everything though. You can only deduct mortgage interest and repairs you make that restore the property to its original minimally functional condition. You can’t deduct capital investments like new buildings, additions or renovations. More on these later.

Capital gains tax

The second tax bill you need to worry about is capital gains tax. The IRS taxes you on any net profits you get out of a property when you sell it. If you’re flipping the property and you’ve owned it for less than a year, you pay short-term capital gains tax, which is the same rate as your marginal income tax rate. If you’re in the 28% tax bracket, you’ll pay a 28% tax on short-term capital gains.

If you hold the property for 12 months, you’ll qualify for more favorable long-term capital gains. Depending on your marginal income tax bracket, these taxes could range from 0% to 15%. In every bracket, however, the IRS takes a smaller cut out of long-term gains than out of ordinary income or short-term gains.

Calculating capital gains

You pay capital gains tax on the difference between your selling price in the property and your adjusted tax basis. Your adjusted tax basis in a property is the original cost you paid for the property, plus any amount invested in renovations and improvements (including labor costs on these projects) that you have not previously deducted for taxes.

If you have deductions associated with the property, you subtract them from your tax basis. If your adjusted tax basis is higher than your sale, you have a capital loss. You can subtract capital losses from a given year from capital gains to reduce your tax bill. If you have more capital losses than capital gains, you can “carry forward” these capital losses into future years to offset future capital gains. If you have no capital gains, you can deduct \$3,000 annually until you have recognized all your capital loss carryforward.

How to defer capital gains taxes: an intro to like-kind exchanges

The IRS provides an important exception to capital gains taxation, made-to-order for real estate investors: If you own an investment property, you can sell your property at a profit and roll your money over into another property within 60 days without having to pay capital gains taxes at all. This transaction is known as a Section 1031 exchange, named for the section of the U.S. Revenue Code that allows it. You cannot swap your rental property for a personal residence, or vice versa. For this reason, these exchanges are called like-kind exchanges, in that the property you replace it with needs to be substantially similar to what you sold.

The 1031 exchange makes it possible for real estate investors to defer paying capital gains tax, which is another advantage over investing in mutual funds, stocks, bonds and other securities or collectibles. Outside of a retirement account, you have to pay tax on gains in these items by April 15 of the year after you sold them.

Depreciation and amortization

This is a broad concept, so we can only cover the very basics here. When you buy investment property — be it a building, a computer or a horse — the IRS knows that the item won’t stay young and new forever. Over time, the property will decrease in value. Depreciation is the process of claiming a deduction to compensate you for the property’s decrease in value during the year.

Note: You can’t depreciate your personal residence. You can only depreciate investment property. For more information on the process of depreciation, see IRS Publication 946, How To Depreciate Property.

Land, of course, doesn’t depreciate. But minerals underneath the land do. If you are extracting oil or other minerals, or timber, for that matter, from the land, you will account for the gradual loss in value through a process called depletion.

Likewise, when you make a purchase of investment real estate or capital equipment with a useful life of longer than a year, the IRS knows you will be using that property to generate income for a long time to come.

Except in certain circumstances, the IRS does not allow you to deduct the full cost of your investment in the first year. Instead, you must amortize your investment over a number of years. For real estate, you must spread the deduction out over 27.5 years.

Passive activity rules

Again, these rules are complex. But in a nutshell, if you are a passive investor — meaning you are not working day to day in the business of managing your real estate investments — you are subject to passive activity rules. Basically, you can only deduct passive losses to the extent that you can cancel out gains from passive activities. These rules restrict your ability to use passive activity losses to offset capital gains elsewhere in your portfolio. Congress implemented these rules in 1986 to eliminate tax loopholes and abusive tax shelters.

Most individual investor landlords can deduct up to \$25,000 per year in losses on rental properties, if necessary (subject to income limitation). Hopefully you won’t have to make use of this provision much.

Property taxes

Expect to pay property taxes to local and county governments each year. Your local government will assess the market value of your property at its “highest and best use” and charge you a percentage of that value every year. You can deduct property taxes against your rental income, though, provided the property tax is uniformly assessed throughout the jurisdiction and is not a special assessment.

Other tax deductions

Watch for opportunities to take deductions for these common real estate investment expenses:

• Mortgage interest