Tax Tips You Need To Know If You're Selling Your House
Recently, Ken Grodner was approached by Apartment Therapy to give a few tax tips for when someone is selling their home. The article he contributed to is an excellent read and was enjoyed by everyone who read it, but we wanted to give you all Ken's full version. Enjoy!
Because a house is considered a capital asset, the profit from the sale of the house is considered a capital gain, and it is subject to capital gains tax. Here are some ideas for reducing the size of your capital gains tax:
If you are able to hold your property for longer than one year, the gain is considered long term and taxed according to your tax bracket, either at 0%, 15% or 20%. Therefore, if you are able to sell a property in a low-income year (e.g. you or your spouse leave a job), you can reduce or eliminate your capital gains tax.
If the house you're selling is a rental property or other type of investment property, you may be able to defer the taxation on your gain if you sell it in a 1031 exchange or like-kind exchange. Instead of paying taxes on the gains now, you push the gains into another property and pay the taxes later when you sell the new property.
However, a number of criteria must be met, including closing on the new property within 180 days after the initial sale. While that may initially seem like a long time, we often see clients scrambling to close before the 180 day deadline.
While many of our clients are aware of 1031 exchanges and the benefits of long-term gains, cost segregation and opportunity zones are two additional tax reduction strategies many may not be aware of.
Cost Segregation allows investors to accelerate depreciation deductions and defer taxes. Depreciation for an investment property is typically calculated based on a useful life of 27 ½ or 39 years. Leveraging this approach, you identify and segregate property-related costs that can be depreciated over as little as 5 years such as electrical outlets for appliances or computers.
Opportunity Zones were created to promote investment in distressed regions of the country. When you invest in Opportunity Zones with the capital gains from the sale of a property, you can defer all capital gains for eight years, decrease the amount of any capital gains tax by 10% and 15% and even receive a full tax exemption on future capital gains from the invested funds if certain criteria are met.
Since there is no income restriction for investing in Opportunity zones, this strategy works well for investors in high tax brackets.
