If there is one thing we all can agree on it is taxes and the desire to pay less of them. Here are a few ways to lighten your tax burden when you are selling a property.
Ways to Save Taxes When Selling a Property
Avoid Short-Term Capital Gains:
This one is the most straight forward. If you buy and sell something within one year you are taxed short-term capital gains. If you wait more than a year then it is long-term capital gains.
Short-term capital gains are taxed at your ordinary income rate, which can range as high as 30+% while long-term capital gains are capped at a high of 20%
For flips holding a year may not be prudent or possible, but on rental properties this is a layup.
The 1031 Exchange rule basically allows you to postpone the tax bill when selling a property in exchange for another of the same or greater value.
Say you sell a property for $250,000 that you bought for $150,000 – you’d have a pretty hefty tax bill. However, if you plan to use those proceeds to buy another property that costs atleast $250,000 then the tax bill is basically put on pause.
You would not pay taxes until you sold the second property, assuming you didn’t 1031 exchange again. This is a great way for investors to expand into bigger unit buildings while not having to pay tax every time they sell the prior unit.
There are many rules that need to be followed on this. Potential properties you will purchase with the proceeds need to be nominated within 45 days of selling and you need to close on something within 180 days.
Be sure to have an accountant or 1031 specialist handle this for you as one misstep and the IRS can void your exchange eligibility.
Yep, seller financing as a tax strategy. Rather than just sell that flip and get slammed with one big tax bill, how about seller financing? You take a down payment, which you will pay the short-term capital gains tax on and then receive monthly payments and pay taxes on the interest income.
As you can see there are ways to make the tax burden of selling a property a little less painful. I aimed to be as accurate as possible with the info in this article, but always refer to a tax professional before taking action.
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