Tax Consequences of Selling Property

As an investor in real estate, you are particularly sensitive to the tax consequences of selling your property. Just keep in mind the following laws and alternatives you may have. Always remember that what you pay taxes on is the gain on the adjusted basis of your home, not the sales price.  An accountant or tax attorney to help you determine what your best options are.

1. If you buy and sell a property before a year’s time is up, you will be subject to short term capital gains. Right now, the federal short term gains tax rate is 35%, and don’t forget about your state and local taxes.
2. If you sell a property after a year, you will be subject to long term capital gains. Currently, we are at an all time low with a 15% federal long term tax rate. Again, do not forget local and state taxes.
3. If you have both owned and occupied your home for the 2 years (24 months) of the last 5, you should be eligible for one of the greatest tax breaks of all time. If you are single, you can take $250,000 of GAIN tax-free, and if you are married, you can take $500,000.If two unmarried persons own and occupy a property for at least two of the last five years, they are each eligible for the $250,000, but each single person must be on the title.Even in the case that you have rented out your former residence, it is possible that you can still take capital gains tax free. Example: You owned and lived in the property from January 2001 to December 2002. You rented the property in January 2003 until September 2005 and sold the property in November 2005. You still owned and occupied the property for two of the last five years, so you qualify!
4. 4. To defer your capital gain taxes on an investment property, you can perform a Starker 1031 tax-deferred exchange. This is a complicated process and should be set before you buy a new property, but MUST be set up before you sell your current property. This tax law will let you defer all capital gains IF you use the money to purchase a new investment property of equal or greater value. This is a relatively complicated law, so consult me for more details on your situation. For companies that can set up your tax-deferred exchange, link to the Realty Exchange Corporation, click here.
5. So, can you sell an investment property under the Starker 1031 exchange, buy a new one, move into it yourself, sell it and never pay taxes? Yes! You must first rent (or attempt to rent) the new property out, preferably for 1-2 years, and then you can move in (the IRS has left this period undefined, but most advisors suggest at least a year). Then, if you want sell this property and take advantage of your $250,000/$500,000 tax-free capital gains, you can, but the IRS just changed the required residency period. In this case, you must own AND occupy the house for 5 years before selling it to take any capital gains on the new property tax-free.