Selling real estate can trigger significant tax consequences—both good and bad. Knowing the rules before you sell can help you maximize profits and avoid surprises.
1. Selling Your Primary Residence
You may qualify to exclude up to $250,000 in gains ($500,000 if married filing jointly) if you’ve lived in the home for two of the past five years. This can dramatically reduce or even eliminate capital gains tax.
2. Selling Rental Property
- Depreciation Recapture: The IRS requires you to “recapture” the depreciation you claimed (or could have claimed) and tax it at up to 25%.
- Capital Gains Tax: Any appreciation beyond the recapture amount is taxed at capital gains rates.
3. Planning Strategies:
- 1031 Exchanges: Defer taxes by reinvesting in another investment property.
- Installment Sales: Spread the gain over several years to potentially lower your tax rate.
- Charitable Remainder Trusts: Donate property, avoid immediate taxes, and receive income for life.
- Opportunity Zone Investments: Defer capital gains and potentially have tax free profits on the back end.
4. Retirement Considerations
Selling a home to downsize or liquidate a rental can also shift your retirement income needs and investment allocation—so coordinate with your financial plan.
Bottom Line:
A property sale is both a tax event and a financial planning event. The earlier you start strategizing, the more options you have to reduce taxes and align the sale with your long-term goals. Partnering with a Wealthnest advisor can provide you the proper guidance needed to develop a quality gameplan when it comes to you real estate investments.