You have owned your Summit County property for years and it has seen some significant appreciation. Now that it’s time to sell you need to think about that appreciation as a tax bill. It can be a scary thought but when you put it in this perspective you will be motivated to figure out how to reduce your tax bill.
Personal Capital Gains Exemption
Reducing your tax bill doesn’t mean selling for less, although that is one way. More than likely, it is not going to be your best option. If your home is your primary residence you have a capital gains exception in the amount of $250,000 for a single person or $500,000 for a married couple. That may be enough to eliminate your tax bill all together. If you’re curious how much capital gains tax you may owe, try out this capital gains calculator.
Reduce Your Tax Bill With a 1031 Exchange
If your home is a second home or investment property consider a tax deferred exchange. A tax deferred exchange is more commonly known by the IRS tax code number as a 1031 Exchange or a Starker Exchange. If you sell your property and plan to buy another property it could be a good fit. The property you plan to buy doesn’t have to be in the same area or even another home; land and commercial properties can qualify too. Learn more about 1031 Exchanges to see if it could reduce your tax bill and be the right option for you.
Convert Your Rental
You may want to convert your rental property into your primary residence for two years before you sell. This can get a bit sticky with how much tax you owe so talk to your accountant before jumping into this. However, as your primary residence, the property would qualify for the personal capital gains exemption that would reduce your tax bill if not eliminate completely.
Create a Trust to Change Ownership
Another option that reduce your tax bill is holding a property in a trust. This is more for passing a property along to family than just selling a property. Ownership can change in the trust without changing ownership of the property. You will need to talk to your attorney and accountant for specific advice on what type of trust you need and how it will benefit you.
Property Inheritance
If you leave your rental properties to your heirs, they will inherit them at a stepped up basis, meaning their current value instead of the original purchase price. Depending what they plan to do with the property, that could minimize or eliminate the tax bill you would have had if you had sold it prior to your death. This is another one that needs advice from a tax professional, financial advisor and/or an attorney.
Your Responsibility
As real estate agents we encounter many different real estate scenarios that have been beneficial to our clients. However, every situation is different. We are not tax/financial advisors nor attorneys. We highly recommend you discuss your specific situation with your trusted advisor before using any of the ideas mentioned here.
