How can I avoid capital gains tax on the sale of rental property?

Question

I do not want to live in that property for two years.

Answer 1

You can avoid paying capital gains by doing something known as a like-kind exchange (often referred to by its section of the IRS code - 1031). In a like-kind exchange, you find a Qualified Intermediary to trade your property to, and then you identify a replacement property. The Intermediary buys the property on your behalf and trades it to you. The replacement property must be of equal or greater value than the old property.

NOTE: QandA's answer is incorrect.. you do not technically SELL the old property. Once you do that, Capital Gains will be taxable!

Doing this type of transaction, you POSTPONE, but never avoid the capital gains. When, one day, you cash out or trade your property for something else, THEN you realize the gain and pay tax on it.

If you own a rental property, a like-kind item is any other real estate that is for rent. This includes houses, apartments, condos, office buildings, warehouses, etc. So if you have a rental house, you can "trade" up to a trailer park if you want.

Remember, though, capital gains may be a good source of income, tax-wise. If you have held the property at least a year and a day, the tax rate on the gain is LOWER than your tax on wages. If you are in the 25% tax bracket, your long-term capital gain is limited to 15% (although any depreciation deducted while you owned it is subject to "recapture" or payback at 25%)

The WealthBuilder
ENrolled Agent / Tax Specialist

Answer 2

2

Answer 3

I hope this helps.

Avoiding pinch from capital gains difficult


By THOMAS MUSIL of Knight Ridder/ Tribune News Service
Published Saturday, April 1, 2006
Q. My husband and I own a rental condo in Sandestin, Fla., with two other families. We would like to sell our one-third to one of the other families. Can we do a simple quitclaim? We purchased the condo for $259,000 in 1996. It is now worth about $800,000.

Over the years we have put in more than $100,000 to cover the costs. We have very little in the way of capital improvements within our condo, probably about $1,000 each. A large portion of that $100,000 was paid to our management company for the reconstruction of our building and the other eight buildings in our complex. The initial construction was very poor, and we have had to do many improvements, such as hurricane tie downs, replacement of the stucco face of the building, fixing leaks around the windows etc.

Will we have to pay capital gains on our entire proceeds, or will we be able to deduct the $100,000 and pay taxes on that lesser amount?

A. A quitclaim deed would convey your interest in the property to the family buying your share of the condo. However, I would check with a local attorney and have the attorney prepare the documents that will convey title. This should not be too expensive, and you can contact more than one attorney to check prices. Also, contact your management company and obtain information that they might require as part of a unit sale.

With respect to the tax consequences of this transaction, the Internal Revenue Service will allow the monies spent on improvements to be added to your basis in the property. Improvements that qualify to be included in your basis are items that add value, prolong the property’s useful life or adapt the property to new uses. When you contact the management company, request a cost breakdown of the $100,000 to document your adjusted basis in the property.

Answer 4

you're in a position to defer the tax with the aid of replacing the actual materials for yet another piece of actual materials which has a enterprise use. it incredibly is declared as a "1031 substitute". or you will possibly be able to desire to bequeath it on your heirs, who will inherit the valuables on a stepped-up foundation and not pay tax on the capital income which you had.

Answer 5

I think your only other option is a 1031 exchange, where you sell your property but buy another similar property.

Answer 6

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