Minimize Tax on Selling Real Estate
What can you do to save on real estate tax when selling your property? You can sell shares over several years to get capital gains. But, unfortunately, tax on real estate investment won’t provide you such luxury. As capital gains on real estate properties are taxable sometimes, the property owner could differ their capital gain taxes by purchasing a similar investment vehicle, using the IRS Section 1031 exchange.
The Section 1031 Exchange
Section 1031 is an IRC (Internal Revenue Code) provision, also known as Straker Loophole. It defers tax on qualifying exchanges of like-kind real estate, and these qualifying exchanges are known as Section 1301 exchanges or Straker exchanges. In other words, if the investor exchanges their business or investment property with likely similar business or investment, which recognizes no real estate transactions, gain or loss, and incurs no immediate capital taxes, then they can apply for Section 1031 exchanges. Under Section 1031, the exchange of inventory, stocks, bonds, and other assets is not applicable.
At the beginning of 2018, exchanges on real estate are limited by new tax legislation. However, under Section 1031, the exchanges of properties like artwork are no longer applicable.
Rules and Regulations for Tax on Real Estate
Section 1031 exchanges may not allow avoiding capital gains taxes in all cases. For exchange, if the investor has the exchange of U.S real estate with real estate in another country, they are not applicable for capital gains tax-free exchange status. Additionally, if the property is used for a personal purpose such as exchanging for a rental property by your residence, then it is also not excepted.
Ways to Save on Taxes When Selling Property
Strategy 1: Pay the Capital gain tax
The simple way to save on taxes is to pay your capital gains taxes. However, many of you may think this a crazy idea to do, but it is a beneficial step you can take. If you do so, you don’t have to worry about it later.
Strategy 2: Installment Sale
This is a long-term tax-saving strategy and allows you to keep your income out from higher tax payments. This involves receiving your income over time including interest payments from your buyer.
Strategy 3: Opportunity Zones
These investments are designed for communities undergoing economic struggles. Moreover, it allows investors to get taxable gains or sometimes tax-free belonging to designed zones.
Strategy 4: Section 1031 Exchanges
As mentioned above the Section 1031 exchanges allows you to save on capital gain taxes. Here are some situations where you can get a full tax-free exchange.
Full Tax-Free Exchange on Real Estate
- The property must be “Like-kind”: If the property is likely similar such as, same nature or character but may differ in quality, you will receive the tax-free treatment.
- The property must be related to business or investment: Exchange property should be for productive business purposes or investment use and must be traded for the same use.
- The transfer must take place within the 180-day window: The property transfer must be done within the 180-days or tax return due date including date extensions.
Bottom Line
Many people receive favorable returns on taxes from the federal government as there is an increase in real estate sales.
