Avoiding Capital Gains Tax on Real Estate

For many people, real estate represents a significant share of their wealth. People may own primary residences and second homes for vacation purposes or purchase investment property to generate income and wealth. However, property owners wishing to sell their real estate may trigger capital gains taxes that cut into the value they’ve built in their properties without careful planning.

When you need help avoiding capital gains tax on real estate, the legal team at 453 Trust Powered by Pennington Law can offer potential solutions to offset unnecessary tax burdens. Our law firm provides a one-stop solution for clients seeking clear guidance and protection from IRS compliance issues.

Our team includes experienced professionals in tax law, asset protection, estate planning, trusts, financial and wealth management, and investment strategy. We work collaboratively to provide tailored solutions that meet your unique needs.

Serving clients nationwide, we are standing by to discuss your legal options for managing capital gains tax liability on your property sale. Contact us now to get started.

What Are Capital Gains Taxes, and Why Should I Care?

Many property owners see an increase in real estate value during their period of ownership. When it comes time to sell your property, you may incur a capital gain — the profit made from selling it for more than you paid. The federal government and most states impose taxes on capital gains. Although you must pay capital gains taxes in the tax year in which you sold your property, various legal strategies can help you defer capital gains tax on real estate.

Here’s why it matters: Tax liabilities for capital gains can cut into the profits you make from selling real estate, reducing the wealth you’ve built by owning or investing in property. That’s why it’s crucial to learn how capital gains taxes work and how they could affect you.

How Are Capital Gains Taxes on Property Sales Calculated?

The government determines the amount of capital gains to tax for a real estate sale by subtracting the property owner’s basis in the property from the price for which they sold the property.

In many cases, the price that a property owner pays to purchase their real estate becomes the owner’s basis. However, a property owner may have a stepped-up basis in real estate, such as when inheriting property from a loved one. In these cases, the person does not inherit the decedent’s basis but instead receives a basis equal to the fair-market value of the property on the day the individual died.

How Much Capital Gains Tax Will I Owe When I Sell My Property?

The amount of capital gains tax that you may owe when selling real estate depends on several factors.

First, your tax rate will depend on whether you have a short-term or long-term capital gain.

• Short-term gain – You owned the property for a year or less.
• Long-term gain – Owning a property for more than a year results in long-term capital gain if you sell it for a profit.

Federal tax law taxes short-term capital gains at the taxpayer’s ordinary income tax rate. However, the IRS taxes long-term capital gains at a flat rate, with the rate dependent on the taxpayer’s income bracket. Most taxpayers will pay a 15 percent tax on long-term capital gains. However, the rate can range from zero to 20 percent for most assets, depending on the income level. In some cases, the rate can be as high as 28 percent.

Most states also impose taxes on capital gains. The majority of states that impose taxes on capital gains tax them at the same rate as the taxpayer’s ordinary income tax rate. However, some states have exceptions, either lowering or increasing the effective tax rate on long-term capital gains. To understand the federal and estate tax laws that apply to your case, check with a lawyer at 453 Trust Powered by Pennington Law.

Can I Avoid Capital Gains Tax on My Primary Residence?

The Internal Revenue Service (IRS) allows homeowners to avoid some or all of the capital gains tax levied on the sale of their primary residence. A homeowner can exclude up to $250,000 of capital gain from the sale of their primary residence ($500,000 when married filing jointly).

A homeowner may qualify for the primary residence exclusion by meeting the ownership and use tests, which require that the homeowner owned and used the property as their main home for at least two of the five years preceding the sale.

Ownership and use do not have to overlap, but must occur within the five years preceding the sale. However, the law excludes homeowners from using the exemption if they’ve excluded capital gains from the sale of another home within the two years preceding the current sale.

Can I Avoid Capital Gains Tax by Selling Through an Installment Sale?

Although conducting a property sale through the installment sale method can help you defer taxes, you cannot eliminate capital gains taxes. Instead, the installment sale method requires you to pay capital gains taxes on any part of the sale proceeds that you receive. Therefore, whenever you receive any portion of your real estate profits, you will have to pay capital gains taxes for those payments for the tax year you received them.

Contact Our Experienced Attorneys to Discuss Ways to Reduce Capital Gains Taxes 

You’ve invested time and money into building substantial real estate holdings. Before you sell, you deserve to enjoy the value of your investment without getting stuck with undue tax burdens. Discover your options by reaching out to the experienced attorneys at 453 Trust Powered by Pennington Law.

We’re ready to talk about strategies that can help you defer taxes on real estate profits so you can manage or reinvest your wealth to achieve your financial objectives. Call or contact us now for a free consultation.