Many people are looking for ways to minimize their tax liability every fall. One area where taxes can be quite hefty is capital gains on real estate properties. The good news is that there are a few strategies you can use to help reduce the amount of taxes you have to pay. In this blog post, we will discuss 5 ways to minimize capital gains taxes on real estate properties!
What is Capital Gains Tax?Capital gains tax is a tax on the profit you make when you sell an asset that has increased in value. The asset can be anything from stocks and bonds to real estate or even collectibles. For example, let’s say you bought a house for $200,000 and it is now worth $250,000. If you sold the house today, your capital gain would be $50,000. Unless you qualify for one of the exceptions, you would have to pay taxes on that capital gain. The current tax rates on long-term capital gains (assets held more than a year) are 0%, 10%, and 20% (this varies depending on your income). So it’s important to take advantage of the strategies we will discuss below before the end of the year!
Short-Term vs. Long-Term Capital Gains TaxTo avoid paying the higher capital gains tax rate, you will want to hold on to your assets for more than a year before selling them. This is because long-term capital gains are taxed at a lower rate than short-term capital gains. For example, let’s say you bought a stock for $100 and it goes up to $150 after six months. If you sell the stock immediately, you will have to pay taxes on the $50 profit at your ordinary income tax rate (which could be as high as 35%). However, if you wait more than a year before selling the stock, you will only have to pay the 20% long-term capital gains tax rate.
5 Ways to Minimize Capital Gains Taxes on Real Estate PropertiesNot everyone is able to deal with taxes efficiently. This is why a lot of our clients reach out to us for consultancy, and we guide them in the best possible way to help them minimize their taxes. You can book a call with GCG Structuring as well, and we’ll assist you with our decades of experience in the US Real Estate market. Here are five ways that you can minimize your capital gains taxes yourself!
Offset your Losses Against your GainsOne way to reduce the amount of capital gains tax you have to pay is to offset your losses against your gains. For example, if you sell a property for a $20,000 profit but also sold another property for a $30,000 loss, you would only have to pay taxes on the difference between those two numbers ($5000).
Use a Tax-Deferred AccountIf you sell a property and reinvest the proceeds into another property within 180 days, you can use the “like-kind” exchange rules (1031 exchange) to avoid paying any taxes on the sale. This rule applies specifically to real estate transactions and allows you to defer the capital gains tax as long as the new property is of equal or greater value. Other conditions include:
- The property should be similar in nature and character to your previous investment.
- No direct exchange between seller and buyer.
- The transfer has to be done through a proper intermediary.
Qualified Opportunity ZonesThe Tax Cuts and Jobs Act of 2017 created a new tax incentive for investors who put money into “Qualified Opportunity Zones.” These zones are areas that have been designated by the state as being in need of redevelopment. If you invest in a Qualified Opportunity Zone, you can defer the capital gains taxes on any profits from the sale of the investment until 2026. And if you hold onto the investment for at least seven years, you will be eligible for a reduction in those taxes. The benefit also depends on how much time you actually hold the QOF investment:
- For five years or more, the basis increases by 10% of the deferred gain.
- For seven years or more, there’s an increase of an added 5% of the deferred gain.
- For ten years or more, the basis can be adjusted to the market value when it is sold.