Defer Capital Gains Tax on Real Estate Investments

Capital gains tax can be a major expense for real estate investors when they sell a property. But, understanding the rules and taking the right steps can help investors minimize the tax burden. In this blog post, we’ll explain the basics of capital gains tax and how to avoid it when selling real estate investments. Learn how to defer capital gains tax with real estate investing.

What is Capital Gains Tax?

Capital gains tax is a tax on the profits made when selling an asset, such as a real estate investment. The amount of tax paid is based on the difference between the selling price and the purchase price of the asset. The tax rate may be different depending on the type of asset and the length of time it has been held.

Capital gains tax can be a significant expense for real estate investors, so it’s important to understand the rules and take the right steps to minimize the tax burden.

How to Defer Capital Gains Tax on Real Estate

Buy and Hold

One of the best ways to avoid capital gains tax is to buy and hold a property for more than a year. If you buy a property and hold it for at least a year, any profit you make from selling it will be considered a long-term capital gain and will be taxed at a lower rate than a short-term gain.

This strategy may not be feasible for everyone, but if you can commit to holding a property for at least one year, it can help you reduce the amount of tax you owe.

1031 Exchange

Another way to avoid capital gains tax on real estate is to do a 1031 exchange. A 1031 exchange is a tax-deferred exchange in which you sell a property and use the proceeds to buy a similar property. This allows you to defer paying capital gains tax on the sale of the property until you sell the new property.

This is a great way to defer paying capital gains tax on a real estate sale, but it’s important to understand the rules and make sure you meet all the requirements to qualify for the exchange.

Invest in a Rental Property

Investing in a rental property can also help you avoid capital gains tax. When you sell a rental property, you can exclude up to $250,000 in profit from capital gains taxes if you’re single, or up to $500,000 if you’re married filing jointly. This can be a great way to reduce your tax burden on real estate investments.

However, it’s important to note that this exclusion only applies to primary residences and not investment properties, so you’ll need to make sure you meet the requirements to qualify.

Invest in a Real Estate Investment Trust (REIT)

Lastly, investing in a Real Estate Investment Trust (REIT) can be a great way to avoid capital gains tax. When you invest in a REIT, you are investing in a portfolio of real estate assets that are managed by professional investors. Any profits from the sale of these assets will be taxed as ordinary income, which is usually lower than the capital gains tax rate.

Investing in a REIT can be a great way to diversify your real estate investments and reduce your tax burden, but it’s important to understand the risks and rewards of investing in a REIT before you commit.

Conclusion

Capital gains tax can be a major expense for real estate investors, but understanding the rules and taking the right steps can help minimize the tax burden. Buy and holding a property for more than a year, doing a 1031 exchange, investing in a rental property, and investing in a REIT are all great ways to reduce your capital gains tax bill.

If you’re a real estate investor, it’s important to understand the rules of capital gains tax and take the right steps to reduce your tax burden. By following the strategies outlined in this post, you can save money on capital gains tax and ensure that you’re making of your real estate investments.

What IRS Forms Do I Need To File?

Take a look at Form 8949, Sales and Other Dispositions of Capital Assets,3 and then reported on Schedule D (Form 1040), Capital Gains and Losses,4 for the forms you need to file. Talk to your accountant or tax advisor for help in filing if necessary.

https://www.irs.gov/pub/irs-pdf/f8949.pdf

https://www.irs.gov/forms-pubs/about-schedule-d-form-1040