Hacker News Reader

Comment by Taniwha | Hacker News Reader

A reminder - in the US by default capital gains are levied at the same rate as any other income - the "capital gains tax" is a LOWER tax on some forms of capital gain intended to encourage some forms of investment (long term rather than stock/house flipping for example)

View on HN

You can flip houses all day long and not pay any tax as long as you buy another piece of real estate within 6 months.

https://www.investopedia.com/financial-edge/0110/10-things-t...

This is A Good Thing and by design. Isn't encouraging investment the whole point?

This particular loophole seems like it was meant to shield homeowners who are moving house. Not for encouraging investment.

It only applies to investment property. If you own your home the first 250-500k of capital gains is exempt depending on your filing status. 1031 exchanges are a decent amount of work and have some additional requirements (it's not really for house flipping). They are also a tax deferral strategy. The tax eventually comes due.

> They are also a tax deferral strategy.

Carved out only for real estate investors. I don’t see why it shouldn’t either apply to everyone, or no one.

1031 is not for properties the owner lives in. For owner occupied properties, there is a $250k per taxpayer exemption on gain if requirements are met.

As I understand it, it's possible to use both rules on the same property, but it takes many years and specific facts.

Investment or Speculation?

Flipping houses usually means buying a house -> making improvements to the house -> selling it for a profit. I wouldn't call that "speculation".

Speculation in this case could just be buying a house and trying to sell it for a profit later without improving the property.

Or building a house without a buyer already under contract, and trying to sell it for a profit.

Yes, BUT... that money is reinvested... you are allowed a 1 time deduction for your primary residence to downsize... otherwise you are always going to pay the tax when you eventually try to realize gains.

Why does it only apply to real estate? It’s clearly a handout to real estate investors.

The US tax policy is beneficial towards real estate in general- you can debate the reasons why but some things that are commonly brought up:

  1) real estate is relatively illiquid, which encourages long term investment 
  2) real estate is culturally significant as it differentiates us against the British 
  3) real estate is the primary source of gaining wealth for the middle class in the US
  4) real estate ownership encourages community involvement

TOTALLY debatable, but Real Estate is 100% given preferential treatment so far as investments go

Is it really debatable why a historically rich, politically influential class would have favorable tax laws?

It's debatable whether the reasons that class put forth for policies they preferred are valid for society as a whole.

I'd say you've got it opposite. By default capital gains are taxed at the capital gains rate, but if you don't hold the assets long enough you get the short term capital gains rate which is normal income tax.

Mostly I was trying to explain US tax law to non-USAians ... but in general you need to lock in your investment in a way that the IRS can tell that you meet the long term holding requirements (often your broker will do that for you in your 1099 these days if you're dealing in shares)

Exactly, this is backed up by individual income stats on short term and long term capital gains: https://www.irs.gov/statistics/soi-tax-stats-sales-of-capita...

It routinely shows >7x long term vs. short term capital gains.

Reply on news.ycombinator.com