Property is one of the best investments there is in the marketplace. But there are problems to keep in mind, especially taxes. 

Taxes can be a pain in the ass. But do not worry, we’ve got you covered!

In this article, you will discover the 3 best ways to sell a rental property without paying taxes. 

Making Your Rental Property Your Primary Residence

Did you know that by selling a property as a homeowner, you will receive a lower tax liability? This is one of the perks that the IRS offers to homeowners. 

Section 121 of the IRS will exclude up to $250,000 to single filers and it doubles up to $500,000 in married couples who filed at a joint account. all of which are profits from the primary residence. 

But remember, to avoid these tax capital gains, you must keep in mind the rules that the IRS has enforced. 

• The house must be yours for at least 5 years. 
• You have to live in that house for around 2-5 years.

It’s something to ponder if you no longer want to own a rental property to earn money or if you want to transfer from your existing house to the rental.

Use 1031 Real Estate Exchange 

The Section 1031 real estate exchange property of the IRS is one of the popular choices, especially for investors, It allows you to postpone the likelihood of paying the tax you gained from selling the property, giving you enough time for another investment.

Keep in mind that you still need to pay the taxes on capital gains, but it delays that from happening until you find something to replace that property. This technique allows you to expand your real estate property and gain more from it. 

Take a look at these rules if you are considering using this technique. You must understand all the requirements and limitations before trying this.

• First, the property must be “of like kind” meaning that the rental property you acquired must be the same as the one that you sold. But don’t worry the IRS is flexible with the term “like-kind”. For example, if you own a condo and you plan on selling it, it doesn’t necessarily mean you need to buy a condo, you can opt to buy a townhouse. 

To put it simply, they’re fair game as long as both properties are rental units that generate revenue.

• Always remember that timing is important when considering this method. Within 45 days, you must find a substitute property. Within 180 days, the new property must be closed. You will incur capital gains tax on the sale of your initial rental property if you don’t meet those dates.

Use The Tax Loss Harvesting Strategy 

Tax-loss harvesting is a method for balancing capital gains and capital losses to reduce the tax burden. Anyone having capital losses in the same tax year may benefit from this alternative. If you make a profit on your rental property and decide to sell, you can deduct that profit against any losses you may have suffered from other investments.

To better understand the concept. Imagine this: 

This year you made $30,000 from a property sale but lost $50,000 in the stock market. You could offset the profits by selling a portion of your stocks to reduce the amount of tax owed. 

Of course, this technique presupposes that some of your other assets performed poorly in the prior year.

Frequently Asked Questions

When I sell a rental property, what deductions may I take?

When you sell a rental property, you can deduct a variety of expenses, including realtor commissions, title fees, and advertising fees.

How does depreciation work in a rental property?

You may be subject to capital gains tax if you sell a rental property, but you may also be subject to depreciation recapture costs. You will have to pay a 25% federal recapture tax on the depreciation value if you claimed deductible costs while owning the property.

Property owners frequently take advantage of exchange chances and invest earnings into another rental property to avoid paying depreciation recapture taxes and capital gains. A real estate 1031 exchange allows investors to keep adding to their portfolio while avoiding paying taxes on each purchase.

How Are Rental Property Capital Gains Calculated?

Short-term capital gains tax will apply if you bought the property less than a year before selling it. Short-term capital gains are taxed in the same way as ordinary income. This implies that the amount of tax you pay will be determined by your income and your tax bracket.

You’ll have to pay long-term capital gains tax if you’ve owned the property for more than a year. 

Long-term capital gains will be taxed at a rate of 0%, 15%, or 20%. The amount of tax you pay is determined by your income.

Is it possible to avoid paying capital gains tax on a rental property that I inherited?

Yes. Any of the three techniques outlined above can help you avoid paying tax on capital gains on an inherited rental property. You also profit from inheriting it on a stepped-up basis, which means you only pay taxes on gains over fair market value from the date of inheritance, rather than the initial purchase price.

What Now?

Investing in rental properties is a great way to raise your income and increase the value of your estate, but managing a portfolio and navigating difficult tax rules isn’t always straightforward.

Tax preparation is an important aspect of financial planning, and it is something that a professional can help you with. Finding a qualified financial advisor does not have to be difficult.

This is where BASC Expertise comes in we have expert financial advisers, and you may interview them for free to choose which one is best for you. Start looking for a financial adviser today if you’re ready to attain your financial goals.