When you sell a property for a profit, you owe capital gains taxes on it. Maybe. Sometimes. If you don’t know how to avoid real estate capital taxes.
Because real estate investments come with a slew of tax advantages. While you own the property as a rental, you can take nearly two dozen landlord tax deductions. And when it comes time to sell, you can reduce or avoid capital gains taxes on real estate through another half dozen options.
Start thinking about your real estate exit strategies now, long before you’re actually ready to sell. By positioning yourself early, you can dodge the bullet of capital gains taxes on investment properties altogether.
Key Takeaways:
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- The IRS taxes your profits on real estate and other investments as capital gains.
- The tax rate on capital gains is lower than regular income — if you owned the investment for at least a year.
- Real estate investors have many options to reduce, defer, or avoid capital gains taxes.
What Are Capital Gains Taxes on Real Estate?
The IRS requires you to pay taxes on your profits when you buy low and sell high. Capital gains taxes apply whether you earn a profit buying and selling stocks, collectibles, or anything else of value — including real estate.
Uncle Sam calculates your capital gain by subtracting your cost basis (the amount you paid) from the sale price, minus any expenses such as Realtor fees. As with all income and profits, you must report these gains to the IRS.
You can sometimes increase your cost basis to lower your capital gains. For example, you can add some purchase closing costs to your cost basis. Likewise, you can add the cost of property improvements to lift your cost basis and reduce your taxable gain.
Nt all capital gains are treated equally. Capital gain taxes depend on how long you owned the asset, whether you lived in the property as your primary residence, and any adjustments you can make to your cost basis. Homeowners get a special exemption from capital gains taxes, up to $250,000 per spouse (more on that shortly).
Lower capital gains taxes apply to assets you owned for at least a year, referred to as long-term capital gains.
How Much Is Capital Gains Tax in Real Estate?
If you own an asset for less than a year, you’ll owe short-term capital gains tax on it. The IRS taxes these short-term profits at the regular income tax bracket rates. For example, if you pay taxes at the 24% tax bracket, you’ll owe Uncle Sam 24% of your short-term capital gains from that year.
If you hold an asset longer than a year, the IRS taxes your gains at a lower tax rate. Expect to pay 0-20% (exact tax tables below).
Another crucial difference between how capital gains are taxed versus ordinary income: you don’t pay different tax rates for different income segments. If your total taxable income is above the threshold for paying 15% capital gains tax, all of your capital gains are taxed at 15%.
For example, say you earned $150,000 last year, of which $50,000 were long-term capital gains. You pay 15% of the total capital gains, rather than paying 0% on one portion and 15% on another (the way that ordinary income tax brackets work. You’d pay a total capital gains tax bill of $7,500 for the year.
Short-Term vs. Long-Term Capital Gains
Before diving into individual strategies to avoid real estate capital gains taxes, you first need a baseline understanding of short-term versus long-term capital gains.
If you own an asset — any asset — for less than a year and then sell it for a profit, the IRS classifies that profit as a short-term capital gain, taxed at your regular income tax rates. For example, say you flip a house and earn a $50,000 profit on top of your $85,000 salary. As a single person, you would pay taxes on that extra $50,000 in income at the 24% federal tax rate.
Regular income tax rates, and therefore short-term capital gains tax rates, read as follows in 2023:
| Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | $0 – $11,000 | $0 – $22,000 | $0 – $15,700 |
| 12% | $11,001 – $44,725 | $22,001 – $89,450 | $15,701 – $59,850 |
| 22% | $44,726 – $95,375 | $89,451 – $190,750 | $59,851 – $95,350 |
| 24% | $95,376 – $182,100 | $190,751 – $364,200 | $95,351 – $182,100 |
| 32% | $182,101 – $231,250 | $364,201 – $462,500 | $182,101 – $231,250 |
| 35% | $231,251 – $578,125 | $462,501 – $693,750 | $231,251 – $578,100 |
| 37% | $578,126 and up | $693,751 and up | $578,101 and up |
But when you own an asset for more than a year and sell it for a profit, the IRS classifies that income as a long-term capital gain. Instead of taxing it at your regular income tax rate, they tax it at the lower long-term capital gains tax rate (15% for most Americans).
Here are the long-term capital gains tax brackets for tax year 2022:
| Capital Gains Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0 – $47,025 | $0 – $94,050 | $0 – $63,000 |
| 15% | $47,026– $518,900 | $94,051 – $583,750 | $63,001 – $551,350 |
| 20% | 518,901 and up | $583,751 and up | $551,351 and up |
| Additional Net Investment Income Tax | |||
| 3.8% | MAGI above $200,000 | MAGI above $250,000 | MAGI above $200,000 |
And the long-term capital gains brackets for 2023:
| Capital Gains Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0 – $44,625 | $0 – $89,250 | $0 – $59,750 |
| 15% | $44,626 – $492,300 | $89,251 – $553,850 | $59,751 – $523,050 |
| 20% | $492,301 and up | $553,851 and up | $523,051 and up |
| Additional Net Investment Income Tax (NIIT) | |||
| 3.8% | MAGI above $200,000 | MAGI above $250,000 | MAGI above $200,000 |
The easiest way to lower your capital gains taxes is simply to own the asset, whether real estate or stocks, for at least a year.
Capital Gains Tax on Home Sales vs. Rental Properties
The short version: homeowners get an exemption on capital gains tax (under some circumstances). Landlords don’t.
Single homeowners can avoid capital gains tax on the first $250,000 of profits; married homeowners can dodge capital gains tax on up to $500,000. They must have lived in the property for at least two of the last five years however. That means second homes or vacation homes don’t qualify (more on the Section 121 exclusion below). House hackers who live in a property with up to four units, or a single-family property with an accessory dwelling unit, do qualify for the exclusion.
Real estate investors don’t get this homeowner exclusion for capital gains tax. So how can they avoid capital taxes on real estate?
When Do You Pay Capital Gains Tax on a Home Sale?
You typically pay capital gains taxes on sold properties along with the rest of your tax return on April 15.
However the IRS may hit you with a penalty if you owe a large capital gains tax bill and fail to make estimated tax payments throughout the same tax year. Specifically, the IRS says “Generally, you must make estimated tax payments for the current tax year if both of the following apply:
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- You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits, and
- You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your current year’s tax return, or
- 100% of the tax shown on your prior year’s tax return. (Your prior year’s tax return must cover all 12 months.)”
Speak to your tax advisor about estimated tax payments if you expect a large profit on the sale of a property.
How to Avoid Capital Gains Tax on Real Estate
No one wants to pay more taxes than they have to. But as a real estate investor, you have far more options than the average American to lower your taxes, at least on the profits from your investment properties.
Beyond owning the property for at least a year, try the following tax tactics to reduce or eliminate your real estate capital gains taxes entirely.
1. Avoid Capital Gains Tax on Your Primary Residence
When you sell a property that you’ve lived in for at least two of the last five years, you qualify for the homeowner exemption (also known as the Section 121 exclusion) for real estate capital gains taxes.
Single homeowners pay no capital gains taxes on the first $250,000 in profits from the sale of their home. Married homeowners filing jointly pay no taxes on their first $500,000 in profits.
You don’t have to live in the property for the last two years, either. Any two of the last five years qualifies you for the homeowner exclusion.
Consider doing a live-in flip, where you live in the property for two years as you renovate it, then sell it for a profit. It makes for a fun way to house hack, if you’re handy and enjoy fixing up old homes.
Alternatively, you could house hack a multifamily property, then either sell it after two years or keep it as a rental. Either way, you get to live for free and pay no real estate capital gains taxes! Toy around with our house hacking calculator to plug in any property’s cash flow numbers.
You can use the homeowner exemption repeatedly, moving as frequently as every two years and avoiding capital gains taxes. But you can’t use it twice within a two-year period.
2. Check If You Qualify for Other Homeowner Exceptions
Had to move in under two years? You may still qualify for a partial exemption from capital gains taxes on your primary residence.
The IRS offers several exceptions for homeowners who were forced to move, whether for a change of job, health issue, or other unforeseeable events. If you lived in the property for less than two years and were forced to move, speak with your accountant about any partial capital gains exemptions you might qualify for.
3. Raise Your Cost Basis by Documenting Expenses
Here’s a quick terminology lesson for non-accountants: your cost basis is what you paid for a property or other asset, including renovation costs.
Say you buy a property for $100,000, put $40,000 of repairs into it, then sell it for $200,000. You’d calculate your profit by subtracting your $140,000 cost basis from your $200,000 sales price, for a taxable profit of $60,000. (In the real world you’d have all kinds of other deductible expenses, such as the real estate agent’s commission, but they distract from the point at hand so we’re ignoring them.)
It’s easy enough to keep your receipts, invoices, and contracts when you’re flipping a house over the course of a few months. But what about when you own a rental property for 30 years? All those receipts, invoices, and contracts tend to get lost over the years, but they can help lower your capital gains tax bill when it comes time to sell.
The cost of every “capital improvement” you make to the property can add to your cost basis, reducing your taxable gains. Returning to the example above, you buy a rental property for $100,000, and over the next 30 years you pay $500 here and $1,500 there in capital improvements such as new windows, roof repairs, kitchen updates, landscaping, new driveways, and so forth. It adds up to $40,000 in total capital improvements, but it’s spread out over 30 years.
When you sell the property for $200,000, you can raise your cost basis by that $40,000 and pay capital gains on $60,000 rather than $100,000 — but only if you kept all those receipts and invoices. Save digital copies of all cost documents in a folder specifically for that property that you can pull up when it comes time to sell. It can save you tens of thousands of dollars in taxes!
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4. Do a 1031 Exchange
The IRS lets you swap or exchange one investment property for another without paying capital gains on the one you sell. Known as a 1031 exchange, it allows you to keep buying ever-larger rental properties without paying any capital gains taxes along the way.
It works like this. You scrimp and save the minimum down payment for a rental property, buying a property for $100,000 and setting aside the cash flow for a few years. The property builds equity, appreciating in value to $120,000 even as you pay down the mortgage, and after a few years you’ve set aside more cash to boot. You sell the property, and instead of paying capital gains taxes on the profits, you put them toward a down payment on a $200,000 multifamily rental.
A few years later you buy a $350,000 multifamily property, and a few years after that a $600,000 property, each of which produces more real estate cash flow than the last. Eventually, you reach financial independence, with enough cash flow to live on — and you never had to pay a cent in real estate capital gains taxes.
5. Sell in a Year When You’ve Taken Other Losses
Capital losses cancel out capital gains. So if you get hit with losses one year, that year makes a great time to sell your property so your losses offset your gains.
Imagine the stock market dips 10% and you sell off some stocks, hoping to avoid further losses from market correction or bear market. You take $20,000 in losses from selling those stocks.
Meanwhile you own a rental property that you’ve been meaning to sell. You decide to sell it now, knowing you can offset your capital gains on it with the losses you took on your stocks. You sell the property for a profit of $30,000, and you pay capital gains taxes on $10,000 after subtracting the $20,000 in losses from stocks.
Perhaps you even luck out with the timing, putting that $30,000 back into the stock market at its low point and riding the recovery upward.
6. Ladder Real Estate Syndications
When you invest in real estate syndications, you tend to show paper losses for the first few years. You can use those paper losses to offset other passive income and gains.
Why do syndications typically report losses on paper for the first few years, even as they pay you hefty distributions and cash flow? Because syndicators often perform a “cost segregation study” when they buy the property, to recategorize as much of the building as possible to other tax categories with shorter depreciation periods.
Of course, once the property sells and you get your big payday, you’ll owe both capital gains taxes and depreciation recapture. Which is precisely why it helps to keep investing in new real estate syndications every year, so you continue offsetting gains with paper losses from depreciation.
Hence the term “ladder” — the new syndication you buy this year helps offset taxable gains from the syndication you bought four years ago.
7. Harvest Losses
Sometimes, investors strategically sell for a loss, and use that loss to offset their capital gains. It’s called harvesting losses, and it makes sense when you have assets you don’t like or that underperform for you.
Say you bought a portfolio of five rental properties. You find yourself short on cash and want to raise a little capital by selling one, but don’t want to pay capital gains taxes on it.
One of the properties turned out to be a lemon, and has caused you nothing but headaches and negative cash flow. To offset the gains of selling a property with some equity, you decide to harvest some losses by getting rid of the lemon at the same time. It’s just costing you money anyway, so now makes a great time to sell it.
You sell both properties, and the loss from the lemon washes out the gains from a “good” property. You ditch the underperformer that was costing you money each month, and you avoid property gains taxes on the property you sold for a profit.
A more common example involves stocks. Say you buy a stock that consistently underperforms, and you have no reason to believe it will leap up in value in the future. Rather than letting your investing capital languish in the no-man’s-land of bad returns, you cut your losses by selling it, and put the money toward investments that will generate higher returns.
8. Convert Your Home into a Rental Property
If the homeowner exemption leaves you still owing capital gains taxes, you could always just keep the property as a long-term rental. As long as the property cash flows well, there’s no reason to ever sell it!
Let it generate passive income for you, month after month, year after year. As a buy-and-hold property, you can keep depreciating it for accounting purposes even as it appreciates in value.
Before converting your home into a rental property, run the numbers through a rental cash flow calculator. You may find your money could perform better for you by buying a property specifically as a rental, or even in the stock market, rather than sitting tied up in your ex-home.
That goes doubly when you can avoid capital gains taxes on the first $250,000 or $500,000 in profits.
9. Convert Your Home into a Short-Term Rental
No one says you have to rent the property out to long-term tenants.
Run the numbers to calculate how it would perform as a vacation rental on Airbnb instead. You might just find it cash flows better.
Just watch out for local regulations designed to restrict short-term rentals — some cities effectively ban Airbnb rentals.
10. Move to a State with Lower Taxes
Uncle Sam isn’t the only one after your tax dollars. Most state governments actually take a harder stance than the IRS on capital gains from real estate, charging income taxes at the normal tax rate.
Nine states charge a lower long-term capital gains tax rate however, similar to the federal government: Arizona, Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin. Another seven states charge no income taxes at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Finally, New Hampshire and Tennessee don’t charge regular income taxes, but do tax investment income.
Consider moving to a state with a lower tax burden to keep more of your money where it belongs: in your own pocket.
11. Pull Out Your Equity by Borrowing, Not Selling
You don’t have to sell your investment property in order to cash out its equity. Why not pull out the equity and keep the property to boot?
When you own a rental property free and clear, it does cash flow better. But you can still take out a rental property loan or a HELOC against your investment properties to access the equity, all while the property continues to appreciate in value and generate income for you each month.
Your tenants pay off your loan for you, and all the while you keep benefiting from cash flow, appreciation, and investment property tax advantages.
12. Pass the Property to Your Heirs as Part of Your Estate
No one says you have to sell your property. Ever.
Why not keep it until the day you die, and pass the golden goose on to your heirs? It can keep generating passive income for them too.
And they probably won’t pay any inheritance taxes on your rental property either. Your heirs get a free pass on the first $11.7 million you leave them in tax year 2021, so unless you die with 30 properties, they probably won’t get hit with gnarly inheritance taxes.
Best of all, the cost basis resets upon your death. Again, cost basis is what you paid for the property plus any capital improvement costs, and it’s the “basis” on which any profits are taxed. When you die, it resets to the property value at the time of your death.
For instance, say you buy a property for $100,000, and over the next 30 years you put another $60,000 in capital improvements into it. Then you die and leave the property to your favorite child (we both know you have one).
At the time of your death, the property is worth $500,000. If your child were to sell the property, their cost basis for tax purposes would be $500,000 rather than the $160,000 in purchase price and improvement costs that you actually paid.
You avoid real estate capital gains tax entirely, your child avoids inheritance taxes, their cost basis resets so they wouldn’t owe capital gains taxes on all the equity you built, and they get an income-producing property. Win-win-win-win.
13. Buy or Transfer the Property to a Self-Directed Roth IRA
With a self-directed IRA, you get to invest in any assets you like, within a few constraints from the IRS. That makes self-directed IRAs a darling of real estate investors across the county.
And with a Roth IRA, of course, your assets grow tax-free so you don’t pay taxes on profits and returns.
Still, proceed with caution when it comes to self-directed IRAs. They come with setup and administration expenses, and add another layer of complications. Self-directed IRAs add particular challenges when you use real estate leverage to finance with a rental property loan.
Do your homework thoroughly, speak with your financial advisor, and consider leaving your IRA investments to stocks — real estate comes with plenty of its own cooked in tax advantages, after all.
14. Donate the Property to Charity
You could leave your property to your children. Or you could tell the spoiled brats to go earn their own fortune, and give your property to charity instead.
Not only do you not have to pay real estate capital gains taxes, but you also get a juicy tax deduction. For your entire equity in it, based on the current market value of your property.
As a nonprofit organization, the charity doesn’t pay any capital taxes on the property either. Again, both you and the recipient win, and the only party losing out is the IRS.
How to Calculate Capital Gains Tax on Real Estate
Long-term capital gains don’t add on to your regular income or push you into a higher income tax bracket. Instead, the IRS calculates them on a totally separate schedule.
If you earn $50,000 in regular income in 2023 and another $20,000 in long-term capital gains, the IRS taxes you like this. For your regular income taxes, you’d pay 10% on the first $11,000 you earned, 12% on the next $34,725, and 22% on the remaining $5,250.
Because you earned more than $44,625 in total income, you’d owe long-term capital gains tax at the 15% rate.
Capital Gains Tax Calculator for Real Estate
Sometimes you just want capital gains tax calculated for you.
Try playing around with this capital gains tax calculator for real estate investment properties:
As a quick note on depreciation, beware that you owe the IRS depreciation recapture regardless of whether you actually deduct for property depreciation while owning it. So make sure you take depreciation on your investment properties in every tax return!
FAQs on Capital Taxes on Real Estate
Still have questions? Here are a few common ones.
Can home sales be tax-free?
Yes, if you lived in the property as your primary residence for at least two of the last five years, you qualify for the homeowner exclusion (Section 121 exclusion). Single taxpayers are exempt from paying capital gains tax on the first $250,000 in gains, and married filers get the first $500,000 tax-free.
Do you pay capital gains taxes when you sell a second home?
Yes. Unless you utilize one of the tax strategies above, that is.
Do you pay capital gains tax if you lose money on a home sale?
No — capital gains tax applies to gains (profits). If you lose money on a bad investment, the loss can offset other investment gains. You may be able to offset up to $3,000 in active income as well (speak to an accountant!), and you can carry losses forward to future years as well.
Do house flippers pay capital gains tax?
Yes, and usually at the short-term capital gains rate, assuming they own the property for less than a year. If the renovation goes long, and they own the property for over one year, they owe capital gains taxes at the long-term tax rate.
When do I pay the capital gains tax on real estate?
You pay capital gains taxes on properties as part of your annual income tax return due on April 15.
Can you avoid capital gains by buying another home?
If you do a 1031 exchange, also known as a like-kind exchange, to buy a new investment property after selling an old investment property, then you can defer capital gains taxes. When and if you ever sell the replacement property, you’ll owe capital gains taxes at that time, unless you do another like-kind exchange.
You don’t need to buy another property to qualify for the homeowner exclusion on your primary residence.
Do I have to pay capital gains tax if I sell a second home or rental property?
Yes, unless you do a 1031 exchange, which defers it until you sell the new replacement property.
Final Thoughts
When you own an investment property for decades, as so many buy-and-hold investors do, you can rack up some serious equity. Equity that the IRS would love to tax you on, when you go to sell.
So? Outfox them by using one of the dozen strategies above to avoid capital gains tax on real estate. For the price of a little foresight, you can dodge the taxman’s grasping claws, and in the process leave greater wealth behind for your children or favorite charities.♦
What tactics do you use to avoid real estate capital gains tax? What questions or concerns do you have about capital gains taxes moving forward?
More Real Estate Investing Reads:
About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.
This was really helpful and interesting information. Thank you.
Thanks Ally, glad to hear it was useful for you!
We sold a property in nov.2020 for $375500. It was bought in feb.1995 for $210000. Closing costs were $30000. We had lived in it from 1995 to 2009 and after that it was on rent from 2010 to Jan. 2020 We moved into it on feb.1st 2020 to renovate it and sold it in nov.2020.
The renovation costs including property tax of $8500 came to nearly $50000. Capital gains have to be reported now. Our income is low about $50000 in 2020 joint and gross. Will we have to pay capital gain?
Hi Farida, yes you will most likely have to pay long-term capital gains taxes. You don’t qualify for the homeowner’s exemption, since you haven’t lived in the property for 2 of the last 5 years. But I would speak with an accountant about ways to lower your capital gains taxes.
Hi!
I am going through a divorce and my ex would not sign release papers for my house, so I out it in my mother’s name with my cash, no mortgage. Now, I want to sell . How can I prevent capital gains for her because she hasn’t lived here. She has claimed me as a renter to offset the taxes and has claimed any repairs I have made. I am building a new house now. She is 72 years old. Should be a 60,000 profit. I appreciate any comments! Thank you! Dar
Hi Dar, that’s a tricky situation. If she’s the legal owner on title, she owes the taxes on profits. I’d speak with an accountant about how to handle this, as you need expert advice on this one.
So, i do have 2 rental properties and one is a lemon. I know I could offset the capital gains of one with the loss from the lemon, but what if I want to keep the good one rather than selling?
You can use the losses from the lemon to offset other capital gains, such as from sold stocks, or even your other income, up to a certain limit. Definitely speak with an accountant about it before selling!
In your example above for the sale of real estate investment property, can you use capital improvement costs to add to the cost basis if you included the costs of capital improvements as a deduction or as depreciation in previous tax filings?
Hi George, capital improvements add to your cost basis, but if you’ve depreciated them previously, you owe depreciation recapture upon sale. Unless you use a strategy like a 1031 exchange to defer it.
I am in the process of selling a multi-family rental property I have owned for years and would like to do a 1031 exchange to defer/reduce the capital gains tax. Would using the profits from the investment property to buy a single family home that I would rent out and eventually live in qualify for a 1031 exchange?
Hi George, yes that should work, as long as the single-family rental property costs equal or higher than the multifamily you’re selling. Check out our article on 1031 exchanges for full details, and consider speaking with a qualified intermediary about details before pulling the trigger.
Thank you ! Dar
My daughter sold her house she is single makes more than $40000 has about $500,000 in profit. Can she buy parents house to offset the tax?
Hi George, her first $250K in profit is tax-free. For the other $250K, she should speak with an accountant about her options, as you’re talking about significant taxes.
I have vacant land in Florida that I had intended to build on in retirement. I have had if for 17 years. I have an offer to purchase. Is there anything I can deduct against the gain like the real estate taxes I have paid for 17 years?
Hi Nita, you can offset the gain with losses elsewhere in your portfolio. But I’d speak with an accountant or tax attorney about ideas for your specific situation, if you’re talking about a significant amount of capital gains taxes. There’s no substitute for personalized expert help!
Hi, I bought a rental property in 1988. Over the years, it was depreciated. We have done many capital improvements, some were used to offset income, others we held on to, figuring we could use them to offset any gain upon a sale. Well, we just sold the property this month. Once I deduct closing expenses, am I able to use those expenses I never claimed? And since the property was fully depreciated, is my cost basis now $0?
Hi Fritz, yes you should be able to raise your cost basis with any capital improvements you made that you never depreciated. Just make sure you have documentation, in case the IRS comes calling. I recommend speaking an accountant about calculating your cost basis for minimum taxes.
Thank you. So if the property purchase price was fully depreciated, is it a $0 cost basis? Some improvements were expensed but never depreciated. Other improvements were never expensed or depreciated because we didn’t have the income to cover their costs, so we paid for them out of our pocket. We have every receipt whether it was paid from the property account or our own personal account. Yes I am making an appointment with an accountant but just trying to gather and separate all my paperwork beforehand.
Your cost basis wouldn’t be $0. You can only depreciate the cost of the building, not the land. So at the very least, your cost basis is the cost of the land, plus any capital improvements you made that you didn’t depreciate for.
Thank you, that makes it a bit easier to swallow. So just to clarify, expensed improvements can be added to the cost basis as long as they weren’t depreciated? Wondering now if we did this right from the beginning? For example, we installed new windows and deducted the cost from our income on Schedule E but never depreciated the cost.
If you deducted the expense, you can’t add it to your cost basis. But again, you really need to speak with a tax professional, as I’m not one.
Hi! We own two houses, live in 1 and rent 1. We plan to move to FL in 1-2 years.
For the rental we paid $52,000 and now worth $500,000 and owed for 34 years.
Our house we paid $190,00 and current value about $490,000and have it for 16 years.
What is the best plan to sell both and buy 1 house in FL to live in and use the other sale proceeds for retirement? Could we do a 1031 exchange for our current rental and buy the house in FL and live in it ourselves then sell our current home a keep the cash?
Hi Robin, you can sell your primary residence and take the homeowner’s exclusion (up to $500,000 in gains), it sounds like. As for your rental property, you can 1031 exchange that for another rental property, but not to move into. I’d speak with a real estate accountant about doing a 1031 exchange to buy a new rental property in Florida, and then the steps you’d have to take later to convert that rental property into a primary residence (if you wanted to do so).
Hi there. We are currently living in one of our two houses while we renovate it. we have been renting them both out for over three years. We are trying to decide whether to sell this house after we finish or live in for two years to avoid capital gains tax. Do the 2 years start from the month we moved back in or January to January x2?
Hi Robbie, the rule is that you must have lived in the property for two years out of the last five, so it’s not based on Jan-Jan. But speak with an accountant before you make any major life decisions solely based on taxes!
Hello, We purchased land 15 years ago, we have since subdivided and sold some parcels but have also kept some of the land to build on in the future. Can we offset the gain by deducting the total amount paid for the total land purchase and can we deduct interest fees on the loan that we took out to purchase the land initially?
Hi RJ, mortgage interest is deductible each year. If you haven’t been deducting it, you may be able to retroactively file corrections. But these are complex tax questions that you’ll need to speak with an accountant about.
Hello happy to have found you. My husband and I live in FL. We have combined income SS of 48,000. we sold our rental property with a 200,000 profit. bought for $112,000 in 2010 sold for $312,000. Will we owe capital gains tax and if so, do we need to reinvest this year. Property sold in Aug. Thank you.
Hi Michele, with that kind of capital gain, you really need to speak with an accountant. They may charge you $500-1,000 to prepare your return, but they’ll save you $5,000 in taxes. Worth the investment. You can go back to preparing your own tax return next year.
Hello,
We purchased our house in June of 2021 and recently sold it because the market allowed us to sell if for 40k more than we purchased it for, 5 months ago. We are using the proceeds to purchase a new home but were hoping to put only about 3/4 of the money we made down on the new house and the rest to pay off other debts. Is there a certain percentage of the proceeds that must be reinvested into a similar property in order to be exempt from short term capital gains tax? Or as long as we are using a portion of that money to reinvest in real estate, we are good?
Hi Bre, there’s a process you have to follow for 1031 exchanges, declaring the replacement property in advance. Please see our article on 1031 exchanges (https://sparkrental.com/how-do-1031-exchanges-work-defer-taxes-on-investment-properties/) for the details.
Hi, we own a small investment company with rental homes and also flip a couple houses a year. We flipped a house in April, 2021. Then we took all the money and flipped another house. It closed a few days ago, with a profit of $100k+. We are concerned about capital gains for 2021. Our expenses were only $10k. How long do we have to purchase another house to flip before we have to pay capital gains. We didn’t do a 1031 because in the FL market right now, it was impossible to find another property quickly that was what we wanted. HELP!
Glad to hear you’ve had so much success with your real estate investing business Elizabeth!
I hate to be the bearer of bad news, but without having done a 1031 exchange, you’ll owe short-term capital gains taxes on your profits for this year. I’d speak with an accountant about any other expenses you might be able to claim.
One other “trick” you could use is tax loss harvesting. If you have stocks that you lost money on this year, you could sell them for a loss then immediately buy similar (but not the same) stocks, so there’s no significant change to your stock portfolio, but you can document losses to offset your gains. But again, speak with your accountant about it.
Best of luck!
Correction: total expenses with commission:$26k
Hi I was left a property by my Aunt in 2017. The property was purchased as a local authority right to buy @ £72K in 2015.
I completed the probate with no tax pending. I lived in my aunts property up until May 5th 2020. since then it has been rented out.
The property has since been valued @ £230K how do I stand Regards capital gains tax and can I sell the property I live in now, my main residence and move back to the property currently being rented. How long would I need to pay the council tax as my main residence before being able to sell the property free of CGT.
THANKS IN ADVANCE
Hi John, unfortunately I don’t know anything about capital gains tax on real estate in the UK. I’d reach out to a local accountant to hear their thoughts on it. But I don’t see any reason why you can’t move back into the property once you’re ready.
can I spread the capital gains from the sale of my second home over a 5 year period
Hi Helen, I’m not aware of a way to do that, but a good accountant might know some tactics for you. I’d sit down with a sharp accountant or two to hear their thoughts.
Great compilation of life hacks for property owners!
Glad you found the tax tips helpful Stephanie!
GBD: A couple has a house built in July of 2021 and decide they can no longer live together. The house is in his name only. Aside from judicial proceedings, can he sell the house prior to two years occupancy, buy another home with the entire equity, and avoid capital gain tax?
Hi Jerome, I’m sorry to hear about your situation. If you haven’t lived there as your primary residence for two years, it’s subject to normal capital gains taxes.
Hey Mr. Davis, mid 2022 my wife and I bought 3 lots on the coast with a small house on one of the lots. We paid US$ 450,000 for the entire thing. We assume that the lots are worth 115,000, 115,000 and 100,000 respectively with the house on a 115,000 lot. The two expensive lots are adjacent, and the smaller lot is right across the road. The house is currently in a rental pool, but we have not declared it as such. With this lot appraisal, the house would obviously be worth 120,000 and the house and lot together be worth 235,000.
We are thinking of selling that house this year 2023. If we make money on that sale, would we have to pay capital gains tax or would that be absorbed in the total of the three lots? In other words, as long as we do not sell the remainder for a profit over 450,000, we would not pay tax, correct? We would keep the other two and actually build on those.
Hi Wout, I would think that the lot with the house where you’ve been living would count separately from the other two individual lots. If you’ve lived in the house for at least two of the last five years, you could use the section 121 exclusion to avoid capital gains tax on the first $500K in profits on that lot. But speak with an accountant, as I’m not a tax professional.
Mr. Davis, I am considering a joint revocable Trust with my wife and putting our house into the Trust. Our house has an unrealized gain of $500k. Would putting the house into this type of trust cause us to lose out on the $500k capital gain dodge? Would using two separate revocable Trusts be better for this purpose (All else being equal)?
Hi Chester, unfortunately that’s above my pay grade. I’d speak with a tax attorney about that, or at least a CPA. Sorry I couldn’t be more help!