Reduce Capital Gains Taxes when Selling Real Estate
Navigating the complexities of real estate transactions involves more than just finding the right buyer or negotiating a favorable price; understanding the implications of capital gains taxes is equally important!
For property owners looking to maximize their profits from real estate sales, reducing capital gains tax liabilities can be a significant financial strategy. Whether you're selling a primary residence, investment property, rental property or commercial property, employing effective tactics to minimize these taxes can make a substantial difference in your overall returns.
Here, we explore key tips to help you avoid or reduce capital gains taxes when selling real estate properties:
Tip 1: Never Sell
When real estate is sold at a higher value than its adjusted basis, the gain is taxable. To circumvent this loss, one option is to never sell - also known as the “holdover.” Once the property is inherited by an heir, the gain will be reduced or even eliminated due to the step-up basis tax provision, which increases the basis of the property to the market value at the date of death and minimizes capital gains taxes owed if the asset is sold later.
Why does this provision matter? It raises the cost basis for heirs to the asset's market value on the prior owner's date of death, so there is a minimal (if non-existent) difference between the higher new cost basis and the sale price - both of which are used to calculate the capital gains tax liability.
Tip 2: Leveraging the 1031 exchange
The 1031 exchange lets real estate investors avoid paying taxes on profits from selling a property if they reinvest the money into a new, similar property. The main rules are:
Similar Properties: Both properties must be similar in type.
Timing: The new property must be found within 45 days and purchased within 180 days.
Intermediary: A third party must handle the money from the sale.
Equal or Greater Value: The new property must be worth the same or more than the old one.
Investment Use: Both properties must be for business or investment, not person use.
This allows investors to grow their investments without paying taxes immediately. Interested? DBC tax & business advisors will help craft your money-saving strategy!
These are just a few tips to get you started! We know it can be quite complicated to optimize your earnings, especially in the real-estate world. Tax planning and projections are a great place to start. Contact our team to plan for your future!
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