Capital grain tax and investment property

If you've invested in the right piece of commercial real estate, you may find the value going up. You may even decide to cash in and sell.

Just be careful. The Internal Revenue Service (IRS) may want a piece of the deal. Whenever you spend a little to acquire an item and resell it for a lot more, that's called a capital gain -- and it's taxable.

Most people who sell their homes don't run into the problem. Primary residences below a certain value are often fully shielded from capital gains taxes if the owner lived there for at least two years before selling. Unfortunately, that means that many people who haven't been down the capital gains road before aren't aware of just how big of a bite the IRS can take.

The number one key to avoiding capital gains taxes is to simply hold onto the property a bit longer. Short-term capital gains are calculated more aggressively than long-term capital gains. Therefore, a property you've held for a long time can even get down to a 0% capital gains tax (a figure that's much more palatable than 10% or 20%).

But what if the market you're in is really hot right now? Could waiting to sell hurt your ability to turn a tidy profit? If so, you may want to investigate other methods of reducing your capital gains, such as matching your losses as you go.

An informed capital gains strategy is important if you expect your investment property to rapidly increase in value but don't necessarily want to hold onto it forever.