How to Avoid Capital Gains Tax on Real Estate?
There are a couple ways to avoid capital gains tax on the sale of real estate.
Selling Your Personal Residence:
The first way is typically the most common, which is the tax break you get on selling your personal residence.
Homeowners can exclude up to $250,000 of Capital Gains if filing solo. For married couples filing jointly you can exclude up to $500,000. Your gain can be calculated by taking the sale price of your home, minus all fees associated with selling your home, capital improvements, purchase expenses, depreciation, and insurance payments.
One important thing to remember is that you have to claim this property as your personal residence for at least 2 years out of a 5-year period. Once you have lived there for two years, you can sell and take the gains tax-free. You can do this every two years if you would like. Some exclusions apply to the time period part of the law. Mostly for relocation of employment or health purposes. It is best to review with a trusted accountant to ensure you qualify.
Selling Your Investment Property:
The second way to avoid capital gains is by completing a 1031 tax deferred exchange. The number 1031 actually refers to the IRS tax code section it is found in.
If you own a property for the sole purpose of investment, then upon the sale of the property you can simply use a 1031 company to perform an exchange for you.
A tax-deferred exchange is an easy concept. You sell your property. The title company sends the money to 1031 Pros or an intermediary (avoiding any conflict of interest in the eyes of the IRS). 1031 Pros holds the money in a two-signature account. You now have 45 days upon the closing of your sale to identify up to three properties you want to buy. You send those addresses to 1031 Pros for record keeping. You now have 180 days to close on one or more of those properties. The 180 days calculates back to your original sale date. As long as you close before the 180 days is up, you have now deferred paying up to 35% in capital gain taxes on your investment property. There is no cap on the amount of gains you can defer.
It is always best to find the industry experts to handle your 1031 exchange. 1031 Pros have been around for a long time and has handled thousands of exchanges successfully. You can learn more by visiting www.my1031pros.com or calling 801-403-9474. Our consultants are standing by to answer any of your 1031 questions.