Planning to sell your property – Is capital gains tax holding you back?

The best holding period for real estate is forever. If you are a real estate owner, by not selling, you can ride the unstoppable inflation wave and never have to pay any severe commissions or long-term capital gains tax. But forever is an incredibly long period.

There are numerous valid reasons for selling investment property.

Top valid reasons to sell a property

  1. A significant life event – Some key life events that justify the re-evaluation of owning investment properties: a new family member, a terrible accident that requires extra care, a death in the family, job relocation or an unwanted layoff to name a few.
  2. When your cap rate is below the risk-free rate of return – If your cap rate is below what you may earn in a risk-free 10-year Treasury bond, you should consider selling because you’re not amply paid for the risk you are taking.
  3. When there is an ample supply of property in the pipeline – Real estate price performance is mainly defined by the growth in income, jobs, and quantity. If you notice a broad pipeline of condos over the next years, there will inevitably be downside pricing pressure. The solution is to sell before the market gets flooded.
  4. When you begin to top the $250K / $500K tax-free profit – The government permits you to pay zero capital gains tax on the first $250K in profits for individuals, and the first $500K in profits for couples for your principal residence. If you’re approaching these tax-free limits, and you’re still qualified for benefits if you’ve lived in your home for two out of the last five years, then you may regard taking the tax-free profits and acquiring a new place in a cheaper part of the country with possibly more upside.
  5. When you’ve found a better application for the proceeds. If you feel you have a chance of making a better return on a different investment with less risk, locking in your gains may be a good idea.

How property sales impact you negatively

The process of selling a property is already an exhausting progression; the stress of surprise taxes and fees makes it excruciate. Taxes are inevitable when putting your house on the market.

Capital Gains Tax

A capital gains tax is a fee paid to the government when a property or something else of value is sold for more than the price it was bought for. For example, if you purchased a house years ago at $300,000 and traded it for $400,000, you’d pay a portion of your $100,000 profit — or capital gains — to the government.

Capital gains are dependent on the period property was owned for.

How can I lessen capital gains tax on a property?

Here are a few strategies that can help you in reducing or minimizing capital gains tax on property.

  • Occupy your property as a primary residence for at least 2 years

The most efficient workaround capital gains tax is to stay in your primary home for at least two of the five years before you trade it.

  • Sell a property after experiencing capital losses

Tax rates are dependent on your income; hence if you’re going through a period in which you have made less income than usual; sell your property so that you can take advantage of a reduced rate.

  • Track your Home Improvements or selling expenses

If you have made changes in your property, you can claim all the value you added to your house while residing there. Keep a record of money spent on upgrades and improvements and submit documents and receipts while filing taxes.

  • Use your Primary Residence for rental purposes

Renting your property is an attractive solution. However, to be exempt from the capital gains tax, limit the duration you lease it for. After three years, it’s deemed an investment property.

Is there any specific exemption for an investment property?

Yes. 1031 Exchange was developed to stimulate investment in the real estate market and to urge investors to put their money back in the system. From a personal standpoint, this process will allow you to defer the capital gains tax on the trade of a property if you reinvest it in another like-kind property. However, some qualifications must be met to achieve a successful exchange.

The asset needs to be held for a year or longer to be eligible for the long-term capital gains tax rate as it is significantly lower than the short-term capital gains rate for most assets. A qualified intermediary usually handles the gains from the initial sale and securely retained into a trust. The investor gets 45 days to identify suitable like-kind replacement properties and to notify the IRS. The “reinvestment” or acquisition of the chosen properties must take place within 180 days of the sale of the initial property. If any of the guidelines laid by the IRS are not met, the money in the trust will be subject to the appropriate capital gains tax.

Engage our services for a profitable 1031 Exchange and defer Capital Gains Tax

1031 Exchange enables your money to churn the maximum profit for you. However, the exchange process is extremely complex in nature, and it would be wise to seek guidance from expert professionals. We have extensive experience in handling highly profitable exchanges for our diverse client base.

For consultation and assistance regarding 1031 exchange call 888-993-2835 or email us at info@1031xchange.com.

“Our tax-deferred 1031 exchange programs can save millions in taxes, increase investor equity, and compound annual cash flow distributions and returns”