If you’re a real estate investor looking at selling a property, or if you’re thinking of buying a property now and planning long term about selling it, then you might be wondering what taxes you’ll face when you sell. In this blog post, we’ll cover investment property taxes and capital gains—what Wilmington, NC investors need to know to be better prepared.
Before you read further, please note: this information is provided in general for a wide range of readers inside and outside of NC. Every investor’s situation is different—depending on corporate structures, holding time, financing, and personal tax brackets. For that reason, this is a helpful overview only. You should always speak with a qualified accountant or tax attorney before making any final decisions for yourself.
Different Types Of Tax For Different Types Of Income
There are different types of tax for different types of income:
- Earned income (like wages from a job) is taxed at your regular income tax rate.
- Portfolio income (such as dividends or interest from stocks) has its own tax treatment.
- Real estate investment income from selling a property falls under capital gains tax, which operates under separate rules.
Knowing these distinctions helps investors plan ahead and minimize surprises when it’s time to sell.
What Are Investment Property Taxes Capital Gains?
When you buy a property, you pay a certain price. When you sell, you receive what the new buyer pays you. The difference is your capital gain.
Example:
- Purchase Price: $100,000
- Sale Price: $125,000
- Capital Gain: $25,000 (the amount taxed as capital gains)
The gain is not taxed as ordinary income. Instead, it falls under short-term or long-term capital gains, depending on how long you held the property:
Long-term (more than 12 months): Taxed at the preferential capital gains rate, which is usually lower.
Short-term (less than 12 months): Taxed at your regular income tax rate.
Why Do Capital Gains Have A Different Rate?
Capital gains tax rates are usually lower than regular income taxes. There are two main reasons for this:
- Encouraging investment: Lower tax rates incentivize people to buy and sell assets like real estate, which stimulates the economy.
- Reducing burden on large gains: Real estate can appreciate significantly, and taxing at regular rates would be prohibitively expensive for many investors.
In short, capital gains tax is a way to keep more money in your pocket while still contributing to the economy.
Don’t Forget Depreciation Recapture
One factor many investors overlook is depreciation recapture. If you’ve claimed depreciation on your rental or investment property, the IRS will “recapture” that when you sell. This means a portion of your gain will be taxed at a different rate, often higher than standard capital gains. It’s critical to plan for this so you’re not caught off guard at closing.
Capital Gains On Investment Property Versus Your Primary Residence
Capital gains rules vary depending on whether you’re selling your primary residence or an investment property:
- Primary residence: You may qualify for a capital gains exclusion of up to $250,000 ($500,000 for married couples) if you’ve lived in the home for at least two of the last five years.
- Investment/rental property: This exclusion generally doesn’t apply. The sale will be treated as a taxable investment transaction.
For example, selling a rental in Wilmington, NC is not the same as selling the home you live in. That’s why personalized tax advice is essential.
How Wilmington, NC Investors Can Minimize Capital Gains Taxes
Here are a few strategies investors often explore (with professional guidance):
- 1031 Exchange: Roll your profits into another investment property to defer taxes.
- Longer holding periods: Qualify for lower long-term capital gains rates.
- Offsetting with losses: Use other investment losses to reduce taxable gains.
- Smart timing: Selling in a year with lower income may reduce your effective tax rate.
Final Thoughts
For real estate investors in Wilmington, NC and across NC, understanding capital gains and investment property taxes is crucial. Taxes can take a big bite out of your profits, but with planning, knowledge, and professional advice, you can make smarter decisions that keep more of your hard-earned money in your pocket.
Always consult a tax professional before making a sale—you’ll thank yourself later.