As a real estate investor, you are always looking for ways to defer or reduce capital gains tax.
Here are 7 strategies real estate investors can use to do just that.
1. 1031 Exchange
This is probably the most well-known way to defer capital gains tax. With a 1031 exchange, you can sell an investment property and reinvest the proceeds into another property of similar or greater value. The key here is to make sure that you complete the exchange within the required time frame and that the new property is of similar or greater value.
2. Installment Sale
With an installment sale, you can sell an investment property and receive payments over time. This can be a great way to defer capital gains tax because you will not have to pay tax on the entire sale price all at once. Instead, you will only pay the capital gains taxes on the installments as you receive them.
3. Pre-Tax Retirement Account
If real estate investors have a pre-tax retirement account, such as a 401(k) or an IRA, they can use it to invest in real estate and defer capital gains taxes on the profits from the sale of your investment property.
4. Sell at a Loss
If you sell your investment property at a loss or beneath fair market value, you can use the losses to offset any capital gains from other investments. This can help reduce your overall capital gains tax liability.
5. Invest in Energy-Efficient Improvements
If you make energy-efficient improvements to your investment property, such as installing solar panels or energy-efficient windows, you may be able to take advantage of some federal and state tax credits, which can help offset some of the costs of the improvements and reduce your capital gains tax liability.
6. Donate to Charity
If you donate your investment property to charity, you may be able to take a deduction for the donation on your taxes, which can help reduce your capital gains tax liability.
7. Qualified Small Business Stock (QSBS)
If you invest in qualified small business stock (QSBS), you may be eligible for a special 15% income tax rate on the gain from the sale of the stock, which can significantly reduce your capital gains tax liability.
There are many strategies that investors can use to defer or reduce their capital gains taxes—it is just a matter of finding the right one for your situation. By taking advantage of these strategies, you will be able to keep more of your hard-earned money in your pocket and reinvest it into other opportunities.
Jose A. Ramirez is an experienced and sought-after tax strategist who helps investors through the process of deferring or reducing capital gains tax. He specializes in Short-Term Rentals such as AirBNB and VRBO, Landlords, Wholesalers, Rehabbers, Flippers, Real Estate Brokers, and Realtors. Schedule an appointment with Jose A. Ramirez for any additional questions you may have about this recent event. Make sure you are subscribed to the Advanced Tax Advisors email list so you can receive current events just like this in the future.