Strategies To Avoid Capital Gains Tax On Rental Property

1 Reply

As income gets tighter for everyone, it becomes all the more important to find ways to keep more of your money. Keep it working for you, keep it turning over in investments, and keep it from flowing away in taxes. Capital gains taxes are a big concern for real estate investors, because property is typically a capital gain when it accrues value that is then realized in a sale. And even passive income investors, those who are investing in property for rental or ongoing income purposes, can see capital gains taxes assessed on occasion.

A key factor in the tax code is how profits, which are usually taxable, can be offset with losses. This is designed to encourage business activity, and help cushion the fiscal blow investors and companies take when financial events don’t turn out quite as well as would have been hoped for. Offsetting taxable profits with losses is called tax-loss harvesting, and is a strategy that can shield income from being turned over to the Internal Revenue Service.

Another strategy takes advantage of a provision in the tax code, Section 1031, that allows taxes to be put back if the taxable income from a property sale is instead invested back into a qualifying venture. Your tax lawyer can guide you, but generally the reinvestment needs to go into the same kind of investment; so property proceeds would be put into a new piece of real estate. This lets your profits continue to work for you.

Don’t let the tax man take all the fun out of property profits; avoid capital gains taxes.

Key Points:

  1. 1. You can offset the gains with losses in order to avoid capital gains tax on property that is rented.
  2. 2. You get better tax benefits if you sell property that you own.
  3. 3. Homeowners need to meet certain criteria in order to qualify for a deduction.

Tax-loss harvesting, 1031 Exchanges and converting rental properties into a primary residence can help investors defer or avoid paying some or all of their capital gains taxes

See the original at:

The steady income from your real estate investments can be wonderful, but capital gains can eat into the profits. Don’t let your taxes eat away at what would otherwise be something you can benefit from. Look for ways to keep more of your income in your pocket, or at least working for you. Consulting a tax lawyer could be the smartest investment decision you ever make.

@Dustin Ruhl Love the strategic thinking!.  Unfortunately there's some bad information presented by the company that link points to.  Namely on the conversion of an investment to primary.

1. You do not have to own the property for at least 5 years (unless it was once the product of a 1031 exchange).

2.  They neglect to mention that when you convert a property from investment to primary that you will only get to prorate the gain between periods of qualified use (as a primary) and non-qualified use (as investment).

3. They also neglect to mention that regardless, if you convert an investment property to your primary residence you will have to recapture all depreciation (this can have dire consequences for the investor who converts without truly understanding their basis in the property they want to convert and the consequences of converting a heavily depreciated property into a primary residence).

And of course I always take exception to those who want to tout 1031 as just a means of deferring and that you'll have to pay the tax anyway.  So it's no big deal.  Nothing could be further from the truth.

1. Try telling your IRA or 401K administrator or financial advisor that there's nothing so great about deferring tax.

2. I was just teaching a class of realtors today and we identified 4 different ways that tax can be avoided for the entire life of an investor and then passed along to heirs tax free.  It's that powerful!

Kudos to you for bringing this up!!