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Discover legitimate investment opportunities in rental properties that can provide you with a consistent flow of income and additional profits each month. When it comes time to sell, you stand to reap significant windfalls. However, these lucrative selling events could trigger substantial long-term capital gains tax liabilities. It’s essential to consider the tax implications of these transactions, especially if you want to maximize your profits. For example, married couples filing jointly with a taxable income of $280,000 and capital gains of $100,000 could face taxes of $15,000 on the profits from a rental property sale. But there are effective ways to reduce this burden. Let’s go into detail about three powerful methods that will help you significantly minimize your capital gains tax liabilities.
Tax-loss harvesting is one strategy that can help reduce your tax exposure when selling rental property. This involves pairing the gains from the sale with the loss from another investment within the same tax year.
Another valuable tool at your disposal is Section 1031 of the tax code, which allows you to defer paying capital gains taxes by reinvesting the proceeds from the sale of rental property into a like-kind property.
Lastly, IRS Section 121 enables you to convert your rental property into your primary residence, excluding as much as $500,000 in capital gains from taxes. Each of these three methods can help you find efficient ways to minimize your capital gains tax burden.
Rental property sale FAQs
What Happens to Depreciation When You Sell a Rental Property?
Depreciation claimed on prior tax returns must be recaptured when you sell the property. Consult your tax advisor for a reliable estimate of your potential tax liability.
What Deductions Can I Claim When I Sell a Rental Property?
Upon the sale, various deductions can be claimed, including transaction costs like realtor commissions, title fees, and advertising fees. Seek guidance from a tax professional to identify eligible deductions.
Can I Avoid Capital Gains Tax on an Inherited Rental Property?
Yes, you can avoid paying capital gains tax on an inherited rental property through any of these three methods. Additionally, inheriting it on a stepped-up basis means you only pay gains over fair market value from the date of inheritance and not the original purchase price.
In conclusion, capital gains taxes can eat away at the profits from your rental property sales. Thankfully, by using the tax-minimizing tactics available to you, you can significantly ease this burden and partake in more of the money you’ve earned. Always consult a tax professional for personalized advice.
