It seems every time we turn around we are paying one tax or another. When real estate is sold there are usually multiple taxes to be paid. We are often asked, will I have to pay capital gains taxes when I sell my real estate? A second question becomes, is there anything I can do to reduce the capital gains tax?
Capital gains tax can be crushing. Capital gains taxes are based on profit – the sale price, less closing costs, less the property’s “basis” – a special calculation of a person’s investment in a property. The tax typically 20% – 35% of the profit.
The tax cost can be daunting. For example: “Joe” is elderly and would like to sell rental real estate he purchased in 1960 for $30,000. We sat with Joe and determined Joe’s basis is $50,000. The property has a fair market value of $1,400,000. If Joe sells, he be taxed on the profit $1,350,000, ($1,400,000 -$50,000). At 35% the tax would be $472,500. How can we save tax?
Capital gains taxes can be planned around and reduced several ways. One key is taking advantage of rules for calculating basis.
Another tool that can sometimes help is to simply put off payment of the tax until the tax environment is more favorable…. The law allows taxpayers to reinvest the profit from the sale of investment real estate under “tax free exchange” or “1031 Exchange” rules. There are restrictions. “Replacement” property must be “identified” and purchased within particular time frames and must be investment real estate.
To achieve the full benefit of a tax free exchange a) all monies received at sale must be reinvested and b) the purchase price of the replacement property(ies) must equal the sale price of the property sold. Tax is paid on the portion of the sale not reinvested.
Tax free exchange rules allow payment of the tax to be deferred, put off. The tax paid when the replacement property is sold – unless it is rolled over again – or other planning can be used to reduce tax.
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The content in this document is provided for informational purposes only, and should not be construed as legal advice or an offer to perform services on this subject matter. Contact Visci & Associates to schedule a consultation at our offices in New York and New Jersey.