When it comes to selling property, especially investment properties, capital gains taxes can be a daunting aspect to face. Questions arise as to how much will you have to pay in taxes once you sell, and how will the proceeds from a real estate transaction impact your overall taxes? Should you sell at a high enough profit, you could see yourself in a higher tax bracket, and paying more out of pocket.
There are different selling strategies you can use which can help lessen your tax bill. Forbes, one of the leaders in investment news and advice, has published an excellent article delving into the complexities of selling property and capital gains taxes. One key way to save on capital gains taxes is through an Installment sale.
An installment sale allows for payments to a seller of property to be spread out over time, up to several years. As taxes are calculated on an annual basis, you need only file on incomes received within a tax year. For example, if you sell your property at a profit of $500,000, but receive the income of these profits in annual payments of $50,000 each, you will face capital gains taxes at a smaller level each applicable tax year, as opposed to receiving the proceeds in one large sum.
With an installment sale, taxes are applied differently, using three main criteria to calculate what is due: interest income, return of investment basis and capital gains, as applicable to the tax year in question. Receiving several smaller payments spread out over different tax years can also help keep you within a lower tax bracket, and give you addition income flow.
Another selling strategy which can help lessen your capital gains tax burden is to buy another property within the same tax year. Purchasing a new investment is considered an exchange of income. If you invest in a more expensive piece of real estate than what you sold, this could equate in a non-taxable event for the year.
The best way to ensure you are saving the most in capital gains taxes when selling property is to speak with your CPA or a real estate tax expert*. Each investment situation is unique and there are many complex aspects in play when selling property. Just as working with an experienced Realtor® can help ensure the process is done well and with your interests in mind, a tax expert can help you determine the best course of action for you to take regarding capital gains taxes from your sale.
If you are ready to sell or buy a home, working with a Realtor® who understands the market and the region, will make for a better experience. We at Haylen Group are here to help you with all your real estate needs! As your agent, we will strive to work together and give you the best support we can. Call Helen Chong at (408) 800-LIST or email at Helen@HaylenGroup.com. You can also visit us at our website for available listings and additional information.
*This post is in no way meant to replace any legal or tax advice. This information is taken from sources deemed to be reliable. The Haylen Group does not guarantee accuracy; we recommend information be validated independently.