Selling a Property? Save on Taxes with These Useful Tips
One of the most frequently asked questions we get as tax advisors is related to saving on taxes when selling a real estate property. Even when there are several ways to do this, most taxpayers aren’t familiar with all the different options they have available. That’s why we have gathered four very common, effective, and easy strategies that will allow you to save on taxes when selling a real estate property, including paying the capital gains tax, processing an installment sale, choosing a 1031 exchange, and looking for Opportunity Zones.
The very first strategy we will go over consists in paying the capital gains tax as soon as we sell a property. Even when this might not sound as a tax-saving strategy, it can help us get this balance out of the way from the get-go, leaving the rest of the money for our personal projects. There is an advantage that comes from paying the capital gains tax upfront, though. Most of the times, capital gains rates are lower than the regular income tax rate, ranging from 0 to 20 percent during the last couple of years. In comparison, income tax rates might reach 37% at the highest, so it is worth running the numbers and seeing which one would be better for us.
Whenever we sell a property, one of our main concerns comes from the possibility of significantly increasing our income for that tax year, which would move us from one tax bracket to a higher one. One of the best strategies we can implement when selling a real estate property and save on taxes is by opting to go for an installment sale. This type of sale can benefit both the seller and the buyer, as you would be significantly reducing the chances of ending up on a higher income tax bracket, while allowing the buyer to make smaller payments over a period of time, including interests of course. Before opting for this option, make sure you are aware of all the legal considerations you need to take regarding the security of the payments from the buyer.
If we are looking to sell our property in order to buy another one, we should consider going for the 1031 Exchange, also known as a like-kind exchange. This way, you would be able to sell one property and then buy another one of equal or greater value at the same time. As a result, the property sale taxes would be either deferred indefinitely or until we sold the second property. One of the greatest advantages of like-kind exchanges is that we can do this several time, or exchange one property for multiple ones and vice versa, as long as we stay within the limits of the IRS.
Now, if we are looking to invest the money we receive from selling a property, we should really consider doing so in what we know as Opportunity Zones, also referred to as OZs. These areas are parts of towns or cities that have struggled economically and that allow investors to be part of jumpstarting these communities. When we buy or sell properties located at an Opportunity Zone, we could reduce taxable gains and even have access to tax-free growth opportunities, reinvesting capital gains in properties within designated OZs. The best part is that we don’t need to reinvest the entire sale proceeds on OZ properties, only the gain amount, as long as we do this within the first 180 of selling our property.