How to Reduce Capital Gains When Selling Real Estate
Selling real estate can come with a hefty tax bill, but several smart strategies can help reduce or even eliminate capital gains taxes. Understanding how these taxes work and how to legally minimize them can lead to significant savings.
Understand the Type of Gain
Capital gains are categorized based on how long you’ve owned the property. If it’s been less than a year, the gain is considered short-term and is taxed as ordinary income. If held longer than a year, it qualifies as a long-term gain, which is typically taxed at a lower rate depending on your income level.
Use the Primary Residence Exclusion
If the property was your primary residence for at least two of the last five years, you may qualify for a gain exclusion. This exclusion is for up to $250,000 if you’re single or $500,000 if you’re married filing jointly.
Utilize a 1031 Exchange
For investment properties, a 1031 exchange allows you to defer paying capital gains taxes by reinvesting the proceeds into another qualifying property. This strategy must follow strict IRS guidelines and timelines to be valid.
Increase the Property’s Cost Basis
Documenting any improvements or capital expenses made to the property can increase your cost basis. In turn, this reduces the taxable gain when you sell.
Offset Gains with Losses
Tax loss harvesting allows you to offset your real estate gains with losses from other investments. This helps to reduce your overall tax liability.
Consider Opportunity Zones
Investing the gains into a qualified opportunity zone fund can defer or even eliminate capital gains taxes. However, this depends on how long the investment is held.
Time the Sale Strategically
Selling in a year when your income is lower can reduce the tax rate on your capital gains. Planning the timing of your sale may result in a lower tax bill.
Gift Property for a Step-Up in Basis
Gifting appreciated property to heirs may allow them to benefit from a “step-up” in basis upon your death, potentially eliminating capital gains taxes when the property is sold.
Casey Smith
President, Wiser Wealth Management
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