Real Estate Investor · Los Angeles, CA · Member since 2010 · 19 posts · 0 votes
I have a client who may need to sell his residential non-owmer occupied property in Malibu California asap. His biggest concern in doing this is the capital gains tax he would have to pay on it. His property is worth about $1.8 million, is there any creative way for him to avoid paying a large some of capital gains taxes? Any help would be greatly appreciated. Thanks in advance.
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
15y
The only way your client can avoid the tax completely on his potential sale profit is to die and let his heirs inherit the property at a stepped up basis.
There are no capital gains to be taxed if your client holds the property, or, sells for no profit (breakeven or at a loss). If these are not viable options, then there is no way to avoid paying capital gains taxes if the property is sold at a profit before your client dies.
Your client could reduce the amount of capital gains that might be taxed by moving back into the house and occupying it as his primary residence for two years or more. Then he can exclude up to $250K ($500K MFJ) from capital gains on the sale of his primary residence.
The capital gains tax can be deferred (indefinitely) with a 1031 exchange instead of a sale provided your client wants to continue to own investment real estate.
An installment sale will spread the capital gains tax out over several years, reducing the amount of tax paid in a single year. If the capital gain would trigger AMT, your client might want to use the installment sale to reduce the amount of capital gain he recognizes in any single year.
Accountant · Member since 2008 · 119 posts · 52 votes
15y
Without any more detail than what the property is worth, no one is going to be able to help you very much.
The worth does not do much to determine the capital gains he'll owe.
Questions you may want to answer are:
1. When did he buy it?
2. Has it been an investment property the entire period of ownership?
3. How much depreciation has he taken on the property in the past?
4. What did he pay for the property?
5. Did he rehab the property and for how much? When?
6. What could he realistically sell it for today?
These are a few of the basic questions someone would need answered before even worrying about capital gains. He may not even owe anything.
You probably need to spend a couple hundred bucks and go talk to a CPA in your area so the CPA can look at the complete picture and help your client make a decision on what to do. Decisions like these usually involve a larger scope of the clients entire portfolio and goals.
Investor · Pawleys Island, SC · Member since 2008 · 1k+ posts · 837 votes
15y
The only way your client can avoid the tax completely on his potential sale profit is to die and let his heirs inherit the property at a stepped up basis.
There are no capital gains to be taxed if your client holds the property, or, sells for no profit (breakeven or at a loss). If these are not viable options, then there is no way to avoid paying capital gains taxes if the property is sold at a profit before your client dies.
Your client could reduce the amount of capital gains that might be taxed by moving back into the house and occupying it as his primary residence for two years or more. Then he can exclude up to $250K ($500K MFJ) from capital gains on the sale of his primary residence.
The capital gains tax can be deferred (indefinitely) with a 1031 exchange instead of a sale provided your client wants to continue to own investment real estate.
An installment sale will spread the capital gains tax out over several years, reducing the amount of tax paid in a single year. If the capital gain would trigger AMT, your client might want to use the installment sale to reduce the amount of capital gain he recognizes in any single year.
Accountant · Hyattsville, MD · Member since 2011 · 120 posts · 44 votes
15y
Consider a 1031 exchange or an installmental sale contracts. These strategies have their own rules so please consult a with a Real Estate CPA or a tax advisor
Accountant · Hyattsville, MD · Member since 2011 · 120 posts · 44 votes
15y
Dave T is right - Another alternative is selling the property through an installmental sales agreement so that the profit is realized over a number of years if he does not need the funds immediately