In the last 20 years, there has not been a more attractive market for selling your real estate investments than now. Whether it’s time to downsize, time to sell your vacation real estate, time to relocate for work, time to buy your retirement dream home, or time to move to another state to be near family, home sellers are seeing some of the best sales offers in decades—often for cash and often above their asking price.
While that may seem tempting at first glance, it can come with challenges. The U.S. federal capital gains tax (CGT) means you’ll have to pay taxes on the profit you earn on your real estate sale, which can be as high as 37 percent. That may not leave as much profit in your pocket as you hoped. But there are ways to reduce or defer your CGT exposure so you can keep a larger percentage of profits from the sale of your real estate.
Wait at Least One Year Before Selling Your Home
Properties held for less than a year are subject to short-term CGT and can be taxed up to 37 percent. However, for properties held for longer than a year, long-term CGT applies, which can cut your tax rate to between 0 and 20 percent.
Claim Your Primary Residence Exclusion
If your primary residence meets specific criteria, you can exclude some or all capital gains altogether. If you own and use the property as your primary residence for two out of the five years preceding the date you sell it, you’re eligible to exclude up to $250,000 in capital gains (or $500,000 for married couples). That applies as long as you haven’t taken a capital gains exclusion on any other property at least two years before selling your current one.
Sell When Your Income is Low
Because your tax bracket determines CGT, you can significantly reduce your CGT if you have a loss in income. Let’s say you or your spouse quits or loses their job or you retire, selling during a low-income period can keep more money in your pocket from the sale of your home or investment property.
Take Advantage of a 1031 Exchange for Rental or Investment Properties
If you sell a rental or investment property, you can roll any profits into a similar type of investment within 180 days to avoid CGT. These include 401(k)s, IRAs, 529s, health savings accounts, and irrevocable trusts. This is a complex issue, so be sure to check with your financial advisor and tax professional to determine your best course of action.
Track Renovation Expenses
Additions and home improvements can not only increase the value of the property over the years, but they can also lower your capital gains when you sell. Your taxable gain is based on the cost basis of your home. Improvements like a new water heater, a new roof, or an addition can increase the cost basis of your home. The higher your cost basis, the smaller your tax bill will be once you sell. Let’s say you purchased a home for $400,000, then spend $100,000 renovating it, your cost basis would be $500,000. Then you sell the home for $750,000. You would only be taxed on the difference ($250,000), for which you can take the allowed exclusion.
Surround Yourself with Professionals
In our 30+ years as Realtors representing real estate buyers and sellers all along Florida’s Gulf Coast, we have established a network of top professionals in the legal and financial planning arenas. If you are facing a sale with a capital gain, we would be happy to recommend an expert who can help you keep a more significant portion of the profits in your hands.
Let us know how we can help. To learn more, visit www.personalrealtyadvisers.com or give us a call at 727-317-SOLD.