The U.S. tax code includes a number of tax breaks designed to encourage taxpayers to invest their money. The purchase or sale of investment property carries with it significant tax consequences, for example, including certain tax deductions. Most of these tax deductions are available only for real estate that you hold primarily for investment purposes rather than personal use.
Miscellaneous Investment Expense Deductions
You may deduct certain investment expenses from your taxable income as miscellaneous itemized deductions, but only to the extent that these expenses exceed 2 percent of your adjusted gross income. Deductible investment expenses include expenses you incur incident to buying or selling investment property, such as attorney’s fees and accountant’s fees.
Increase in Adjusted Basis
If you incur a net capital gain from the sale of investment property over the tax year, you are taxed on your gain. You measure your capital gains by subtracting your adjusted basis from the sale price of the property. Since your adjusted basis normally equals your original purchase price plus any related expenses, an increase in adjusted basis results in a decrease in your capital gains tax liability. If you incur a capital gain from the sale of real estate, you may add the cost of improvements, thereby reducing your capital gains tax liability as long as you incur a net capital gain for the year. There is no capital gains tax exclusion for investment property; the federal $250,000 exclusion applies only to your personal residence.
If you borrow money to purchase investment property, you may deduct the interest you pay on the loan up to the amount of your net investment income. Your net investment income equals your total investment income for the tax year minus any investment expenses you claim as miscellaneous itemized deductions. If your investment expenses exceed this limit, you may carry the excess forward to future years subject to the same limitation.
Capital losses occur when you sell investment property at a loss. If you incur a capital loss on the sale of an investment property, you must first deduct the amount of your loss from any capital gains you may have enjoyed from the sale of other investment property during the tax year. If you incur a net capital loss for the year across all transactions, you may deduct up to $3,000 of your losses from your ordinary income. If you still have excess capital losses, you can carry them forward to future tax years, subject to the same limitations.
- Internal Revenue Service: Residential Rental Property
- Internal Revenue Service: Ten Important Facts About Capital Gains and Losses
- Internal ZRevenue Service: Investment Expenses
- Charles Schuab: Investment Expenses: What's Tax Deductible?
- Internal Revenue Service: Like-Kind Exchanges Under IRC Code Section 1031
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