HOW TO REDUCE TAXES WHEN YOU SELL YOUR REAL ESTATE
Let’s start with the good news. You made money on your real estate sale! But now let’s look at the bad news. The IRS wants their cut.
My Consultation Client Had Just One Question
My private consultation client was happy about a lot of things. Their real estate properties had gone up in value. WAY up. And he was ready to sell.
He got calls every day from people who wanted to buy his properties. So he knew they would sell fast.
Now he wanted to talk about how much tax he was going to have to pay. He wasn’t going to get that much cash out of the sales because he’d gotten some extra loans throughout the years. So the tax wasn’t going to be that big. Right?
Wrong!
First, we had to talk about how gain was calculated:
Sales price
Less:?????????(Cost of sales)
Less:?????????(Basis)
Plus:??????????Accumulated Depreciation
The gain on the sale had to do with sales price, costs of the sale and the basis. It had nothing to do with how much cash he got when he sold.
He’d taken out a couple of cash out refi loans that let him have built up equity in the property. He didn’t pay tax when he got that cash, so the eventual sales date is when he had to catch up on all the tax.
And that meant a lot of tax and little cash.
The Magic of Depreciation Becomes a Liability
He’d had profitable, cash flowing property?for years and yet he never paid tax. How? That was the magic of depreciation. He put cash in his pocket each month and yet, legally paid no tax.
There is a time when depreciation can become a problem, though. It’s when you sell. My new consultation client realized now that he had to recapture the past depreciation, add it all back to the gain.
If you think about it, there is a certain logic to it. Depreciation expense is allowed as a deduction because there is the assumption that the structure and improvements will go down in value. In most cases, though, it goes up in value. So when you sell, you need to add back in the amount of depreciation deduction you’d taken. It is added back into your gain calculation.
He Had to Face Some Hard Facts
In order for any strategy to work, you first need to know where you stand. Now that he knew how much capital gains and recaptured depreciation income he’d need to report, he could now look at what strategies may work.
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In most cases, these are the things you need to do BEFORE the sale is closed so you pay less tax. You can set it up to pay tax later, pay tax over time or even avoid tax completely. And even if you have to pay tax now, a good tax strategy will mean you can reduce tax you DO have to pay.
Even if you don’t need to put all of the strategies in place first, you do need to do them before year end. If you’re currently look at a big capital gains tax, make sure you are doing all you can to pay less tax now.
Some of the strategies in the?Home Study Course Tax-Free Real Estate Sale s include:
We also talk about the two things you must know before you sell!
If you make money, or even if you lose money, on your real estate sale, there are strategies. Which one of these strategies can keep more money in your pocket?
The Tax Strategy That Surprised Him!
We went through possible capital loss opportunities so that he could match gains and losses. The one that surprised him was using crypto for loss harvesting.
If you have stock that has gone down in value, you can sell it and take the loss. But you have to then stay out of any ownership position for the stock for the next 30 days. Otherwise, it’s considered a wash sale and you can’t deduct the loss.
That’s not true for crypto. He had crypto that had gone down in value, quite a bit in fact. But he still wanted to maintain the position. He knew about wash sale rules and so figured he couldn’t sell the crypto and take the loss because he would buy it right back.
He was happy to find out that the wash rules do not apply for crypto. He could sell, take the loss and immediately buy back the crypto.
It was one of those “you don’t know what you don’t know” moments. If he had waiting until he was ready to file his tax return next year, it would be too late to use that strategy.
There are several ways that we can help you pay less tax:
**NOTE: The cost of private consultations will be significantly increasing in less than 2 weeks. If you buy a consultation before the increase, you have up to a year to schedule the appointment.
Director of Business Development
3 年Insightful article Diane! Thanks for sharing.
Tax Manager - US Operations || CPA (Washington) || CA(India) || Love helping || Believer || Motivator.
3 年This is great article Diane Kennedy. Booking loss through Crypto sale is great way to plan taxes.