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Are you looking to sell your rental property to boost your investment portfolio? Rental properties can be exciting and very rewarding if you make the right choice at the right time. Investing in rental properties will make steady revenue streams that will cover the mortgage while making some profits each month. But profits and rewards aside, selling a rental property without taking notice of tax liabilities glued with it can be daunting if you are a first-time investor.

Although selling a rental property can earn immense profits for a seller, it may also incur a significant capital gain tax burden. Here are some useful tips to guide you in reducing your capital gains tax while selling your rental property.

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#1 Capital Gains Tax While Selling an Investment Property

Avoid Taxes This Way

Capital Gains Tax on a rental property varies differently and it all depends upon the capital gains you have from your investment property. For example, for a married couple, the tax rate would be 15% if the capital income of the couple jointly filed is between $80,000 and $496,600. However, if your taxable income exceeds $496,600 then the capital gains rate increases to 20%.

It is important to remember that your tax amount will depend only on the profit you have made from the sale of your rental property. 


#2 Deferring Capital Gains Taxes on an Investment Property

One of the best strategies to defer paying hefty taxes on rental property sales is through the tax-loss harvesting technique. Tax-loss harvesting describes the process of reducing the tax amount by connecting the profits of a sale of rental property with the loss you have incurred from another investments in the same year. Although this tax-minimizing tactic is primarily used to offset gains from stock investments, more and more folks are applying it to rental real estate property sales.

For instance, if you have incurred a loss in the stock market and the same year you decided to sell your rental property then you could save your tax amount by pairing the gains of sale to your loss in the stock market.

However, this technique only works if you are a landlord that has two or more investments or the loss you experienced is more or less the same as the gains you made in the sale of your rental property. 


#3 Take Advantage of the 1031 Code

Section 1031 from Internal Revenue Code (IRC) is the opportunity for investors or sellers to defer their capital gains tax amount by making an exchange of their property on the pattern of the “LIKE-KIND” exchange. This means that you can defer real estate tax by purchasing the property of the same kind from the gains you have made from the sale of your rental property. 

Nevertheless, there are more complications in this technique. You must be aware of the legality of this method. As you have only 45 days to choose another potential property of the same kind and same amount and must close it within 180 days.

Always remember that you have a legal process of deferring tax and cannot purchase other items other than “like-kind” potential property or personal property if you wished for.

#4 Defer Capital Gains Tax by Making Your Rental Property Your Primary Residence

Selling a home you live in is more tax beneficial than selling a rental property for a profit. IRS Section 121 allows people to exclude up to $250,000 of the profits from the sale of their primary residence if they’re single and up to $500,000 if they’re married filing jointly.

This technique is adopted more frequently than other techniques by investors. For example, if you want to sell a rental property then to defer tax you must have owned that property for 5 years and have lived in it for a minimum of 2 years. The years of living are not necessarily to be consecutive.

Capital gains taxes can take an exorbitant amount of profit from your investment or business and can incur a great loss to the tune of 15% to 20%. Fortunately, the capital gain tax work around techniques and strategies might be helpful to save that amount of profits and grow your business at a pace. Moreover, always consult with a professional tax consultant or a lawyer to avoid any illegality that might put you in big trouble.  

If you are interested in keeping your rental properties in your name or business, but don’t want to deal with the headache of maintaining the property, we can help! We have different options that we can discuss to help offset your tax burdens, but guide you away from the day to day investing. If you’d like to learn more, you can contact us at (704)-327-2021.

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