Best Way to Avoid Capital Gains Tax On Real Estate (2024)

FAQs

Best Way to Avoid Capital Gains Tax On Real Estate? ›

You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.

Use a 1031 exchange for real estate

Internal Revenue Code section 1031 provides a way to defer the capital gains tax on the profit you make on the sale of a rental property by rolling the proceeds of the sale into a new property.

As long as you lived in the property as your primary residence for 24 months within the five years before the home's sale, you can qualify for the capital gains tax exemption. And if you're married and filing jointly, only one spouse needs to meet this requirement.

But what really turns real estate into a potentially tax-free income producing asset is something called depreciation – an annual income tax deduction that allows you to recover the cost (or other basis) of a certain property over the time you use the property.

A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.

Tax loopholes are simply legal ways to use the tax code to save yourself money. Different loopholes exist for different levels of income. Whether your income level is low, high or in the middle, this guide to the best tax loopholes can help you save money.

Private-placement life insurance, or PPLI, can be used to pass on assets from stocks to yachts to heirs without incurring any estate tax. In short, an attorney sets up a trust for a wealthy client. The trust owns the life-insurance policy that's created offshore.

What lowers capital gains tax? ›

To limit capital gains taxes, you can invest for the long-term, use tax-advantaged retirement accounts, and offset capital gains with capital losses.

The capital gains tax property six-year rule allows you to treat your investment property as your main residence for tax purposes for up to six years while you are renting it out. This means you can rent it out for six years and still qualify for the main residence capital gains tax exemption when you sell it.

Net capital losses can also be carried forward indefinitely. They can be used to offset taxable capital gains (in part or in full) in future years, but there is no requirement to use them when capital gains arise.

You can avoid capital gains tax when you sell your primary residence by buying another house and using the 121 home sale exclusion. In addition, the 1031 like-kind exchange allows investors to defer taxes when they reinvest the proceeds from the sale of an investment property into another investment property.

Overview of the 1031 Exchange

It allows an investor to reinvest the proceeds from the sale of one property into another, similar property, and defer paying capital gains taxes on the entire amount until the new property is sold.

Utilizing a Deferred Sales Trust, investors can defer capital gains taxes over time. Deferred Sales Trusts provide an alternative to 1031 exchanges for deferring capital gains taxes on appreciated assets.