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Nobody, especially real estate investors, likes to pay taxes. But they are hard to avoid when you are earning a good chunk; you will have to give some back to the state. However, if you are adamant about minimizing your taxes and are willing to put effort into it, you may be able to reduce the amount you pay on your portfolio. Here are six ways you can minimize capital gains tax in real estate investing.
Deductible Expenses
When you deduct expenses from your profit, your taxable income depletes, and that leads to a lower amount in taxes than before. So, keep your books straight, and make sure you have a record of everything you have put into a project to increase its value. Every upgrade that has been done will become a deductible expense, and you will only be able to prove that if you have kept a comprehensive record.
The same rule applies to your rentals; if you have taken care of management fees, repairs, maintenance, property taxes, insurance, etc., you have done yourself a huge favor. All these are deductible expenses.
Long-Term Ownership
If you sell your property for a profit before a year has passed, you will be taxed at a higher rate, due to short-term capital gains taxes. So, consider keeping your property for over a year. The easiest way around this would be to advertise it as a rental, get passive income to pay off the mortgage, and sell with less tax when the time comes.
However, with rent and tenants, the property can experience damage, and renovations will be needed before selling. But there is a way around that as well. If the property comes with tenants and their lease has expired, you may be able to utilize a security deposit to help you renovate and sell. This way, you solve all your problems without someone in the market being any wiser.
Live in Your Property
Yes, we understand you bought it to sell and earn profit, but if you want to avoid taxes, this is a good option. Living on your property for two years will get you an exemption of up $250,000 for single filers. And if you are married, you may get up to $500,000 exempt. To make a profit out of this unfavorable position, you must renovate and upgrade the property while you are living in it.
1031 Exchange
The "like-kind exchange" from the IRS under Section 1031 of the tax code is another way of getting tax reductions. Selling one property to buy another will defer capital gains taxes from the sale. However, there are conditions, such as that both properties should be similar. For example, if selling a rental, you will have to buy a rental, and that is not all. There is also a time limit; you get 45 days to find the property and 180 days to get it under your name to utilize the 1031 Exchange.
Time your Sales
When you sell your property in a year that is financially unstable for you, you may get benefits. When your adjusted gross income falls below $44,625 as an individual or $89,250 as a married couple, you can avoid capital gains taxes. When you sell in a low-income bracket, there is a probability that you will get better tax benefits.
Lower Your Taxable Income
Earning less to pay less tax isn't advisable, but there is truth in the fact that not all income is taxable. So, reduce your taxable income by making some changes, like contributing to tax-deferred accounts, such as an IRA or a 401(k), as part of your annual retirement planning. You can also think about contributing to a health savings account (HSA).
Lastly, do your research and know the rules. If you understand tax law cover to cover, nothing will escape you, not even the ways to reduce taxes on real estate.
RCN Capital
RCN Capital offers short-term and long-term financing options for real estate investors, commercial contractors, developers & small business owners across the nation. Whether you are looking to fix & flip properties or hold properties for rental income, RCN has flexible options that are suited to your needs.
