If you’re a real estate investor looking to sell a property—or if you’re planning to buy now with the intention of selling in the future—understanding your potential tax liability is critical. One of the most important tax considerations for investors is the capital gains tax.
In this article, we’ll break down investment property taxes and capital gains, highlight what Milwaukee investors should know, and provide tips to help you plan ahead so you can keep more of your profits in your pocket.
A Quick Note Before We Dive In
The information provided here is general in nature and intended for a wide audience. Your specific tax obligations will depend on factors like your location in or outside of WI, your legal ownership structure (personal, LLC, partnership, etc.), and your long-term investment strategy. Always consult with a qualified accountant or tax attorney before making any final decisions.
Different Types of Taxes for Different Types of Income
Not all income is taxed the same way. For example:
- Employment income is taxed at your regular income tax rate.
- Stock market dividends often have a different, sometimes lower, tax rate.
- Rental income from investment properties is taxed as ordinary income.
- Capital gains—profits from the sale of an asset like real estate—are taxed at their own rates, which can differ from your ordinary income tax rate.
Knowing which type of income you’re earning helps you anticipate how much you’ll owe and develop strategies to minimize that amount legally.
What Are Investment Property Capital Gains?
When you buy an investment property in Milwaukee, you pay a certain purchase price. When you sell it, you receive whatever the buyer pays. The difference between your purchase price (adjusted for certain costs and improvements) and your selling price is your capital gain.
Example:
- Purchase Price: $250,000
- Selling Price: $310,000
- Capital Gain: $60,000
That $60,000 is considered taxable capital gains income.
Why Do Capital Gains Have a Different Tax Rate?
Capital gains tax rates are typically lower than ordinary income tax rates. This is partly because:
- Real estate profits can be significant, and taxing them at a high rate could discourage investment.
- The government wants to encourage the buying and selling of assets, which stimulates economic growth, so they provide a tax incentive via a lower rate.
In Milwaukee, smart investors use this difference to their advantage by strategically timing sales to align with lower-income years or by leveraging 1031 exchanges to defer taxes altogether.
Capital Gains: Investment Property vs. Primary Residence
It’s important to understand that capital gains on your primary residence may be treated differently from gains on rental or investment properties. Under certain conditions, you may qualify for a capital gains exclusion on your home if you’ve lived there for at least two of the last five years.
Investment properties, however, don’t typically qualify for this exclusion. Factors like whether the property was used as a rental, a vacation home, or part of a business can significantly impact your tax liability.
How to Reduce or Defer Capital Gains Taxes
Milwaukee investors often explore strategies like:
- 1031 Exchange: Sell one investment property and reinvest in another “like-kind” property to defer paying capital gains taxes.
- Cost Segregation Studies: Accelerate depreciation deductions to reduce taxable income.
- Holding Period Strategy: Assets held longer than a year may qualify for lower long-term capital gains rates.
Final Thoughts for Milwaukee Real Estate Investors
Understanding capital gains tax on investment properties is essential for maximizing your return on investment. With careful planning, you can often reduce or defer your tax liability, keeping more of your hard-earned profits.
If you’re preparing to sell your property in Milwaukee, it’s worth speaking with both a real estate professional and a tax advisor to ensure your strategy aligns with your financial goals.