How to Improve Your Real Estate Tax Liability
Many astute real estate investors want to lower their capital gains taxes when selling properties. This is called real estate asset protection. You worked hard to maintain the property and to find the right buyers. It is a logical step to want to reap the rewards of your personal success. There are ways of doing so. Read on to learn more.
Add Home Improvements
This activity may not help to avoid all of your capital gains taxes, but it can help. To illustrate, if you home has increased in value, you can reduce your tax bill based on the home improvements you made. This can be anything such as:
- Finishing a basement
- Replacing the roof
- Updating the kitchen
- Building a deck
- Changing the flooring
Any of the above items, and more, can add to the initial price of your home and give you an adjusted cost basis. If you bought a house for $75,000 in 1988 and sold it for $300,000 but spent $40,000 in home improvements then the $40,000 would be taken away from the sales price of your home.
So, instead of owing capital gains taxes on $300,000, you would owe taxes on $260,000. Still, this does depend on the initial purchase prices, how much you spend on improvements and the sale price. It also depends on your tax bracket:
- The 10 to 15 percent bracket pays zero on capital gains
- The 25 to 35 percent bracket pays 15 percent
- The 39.6 percent bracket pays 20 percent
This is why it is crucial to keep all financial records of your home improvement projects.
Postpone the Tax
If you take a look at section 1031 of the IRS code, you can sell your investment property and use the profits to buy a similar property without paying any federal taxes. This is called a 1031 or like-kind. Yet, there are still many rules to follow when pursuing this process.
For example, you must have an objective third party hold the profit before your replacement purchase until you have found a replacement property to purchase. In fact, the exchange process must take place before the sale of the property occurs.
You can learn more through the Federation of Exchange Accommodators.
Rules for Married Couples
Married couples must meet the ownership test to determine if their sale is tax-free. If you owned the home for years, and added your new spouse to the title six months ago, you may have issues meeting the ownership test.
Here is the deal: both spouses must have lived in the residence for two years. This means, your spouse should move in as soon as possible. Then, the both of you need to find out about any previous home-sale histories. If either spouse has sold a home within two years of the sale of jointly owned property, then you won’t quality for double the exclusion.
If either spouse sold a home two months before the wedding, then you have to wait two years after the property’s sale date.
You can find ways to cut down on capitals gains taxes, in order to keep more of your profits. Just make sure you understand tax laws completely.