Wouldn't you want to pay capital gains...?

9 Replies

I have always heard capital gains is terrible, etc... but I have a business partner in another venture and he says when you pay taxes it's meaning you are making money.

The other thing is my ordinary tax is at 37% (fed/state of Iowa) and capital gains is at 24% so wouldn't I rather hold the property for 366 days and pay capital gains?

Depends what your aim is.  Certainly there is a tax benefit for holding the property long than a year, but there are various ways to reduce / defer the tax hit.  

In short, focus on business building first, especially at the beginning...

Holding a property for longer than a year doesn't necessarily qualify it for capital gains treatment.  If you buy a property to flip, it doesn't matter how long you hold it -- you'll still be required to pay taxes at your marginal rate.

Talk to a good tax professional if this concept is unclear...

Here is my mental chart:

NO TAX > LONG-TERM CAPITAL GAIN TAX > SHORT-TERM CAPITAL GAIN TAX > MAKING NO MONEY

Why does Warren Buffet pay a lower tax rate on his income than his secretary?  Because he makes the smart kind of income.  


Why does Warren Buffet pay a lower tax rate on his income than his secretary?  Because he makes the smart kind of income.  

 No because Congress is bought and paid for by corporations and billionaires. Thats why.

Originally posted by @Anish Tolia :

Why does Warren Buffet pay a lower tax rate on his income than his secretary?  Because he makes the smart kind of income.  

 No because Congress is bought and paid for by corporations and billionaires. Thats why.

No. It's because Real Estate does everything government can't do: it provides good housing and creates jobs, which creates more taxes. Ever hear about the velocity of the dollar? RE is the slingshot. RE taxation laws provide incentives for those moving the economy forward.

Buffet's secretary, my work job, your w-2 if you have one, they are spokes in the wheel, but RE builds the wheel.

@Bryan O.

 The reason Buffets tax rate is low is not only because of RE. Its because his income is capital gains which is taxed at lower rates than income. So we say if you actually work , you get taxed more. If you invest, you get taxed less. The problem is the govt uses taxation to do social engineering. Hence mortgage deductions etc. I benefit as much as anyone else from these things. They are still not fair or right. Renters earn less in general and cant deduct rent. Why? A simple flat tax to raise the required revenue for govt functions would be be the most fair way to go. Also it would be more immune to corruption from vested interests. Our tax code is a complete disaster and the reason it got that way is because every lobbyist and industry group and vested interested has their little bit in it. On top of the govt thinks they should social engineer based on tax policy. Why not just use taxes for what their intention is: pay for govt services. Nothing more or less.

Yes, long-term capital gains tax rates are typically less than ordinary income tax rates.   You might also look into 1031 tax-deferred exchange is. The IRS allows you to exchange into a different property after you sell and defer all your taxes if you follow their rules.  

Don't forget that the 1031 exchange also provides relief from depreciation recapture.  So if you are a hold investor and take advantage of depreciation as a tax benefit then you can use 1031 exchanges to mitigate tax on both gain and depreciation recapture.