All Things Real Estate: Reducing and eliminating capital gains when selling

All Things Real Estate: Reducing and eliminating capital gains when selling

Yes, the market is still strong with our limited inventory.  It appears attracting buyers is easy as pie if putting your home on the market at a value that makes sense.

Bidding wars are apparently still occurring. But what if you have been living in your home for 30+ years and potentially, for various reasons, you will endure a moderate to large capital gains exposure?

Would you rather pay it up front in the year of your closing or minimize the amount over a specific number of years?  Or, would you like to potentially pay nothing?

There are strategies that will enable you to accomplish this.

First, have you considered becoming the lender to your prospective buyer? With interest rates this past week exceeding 7%, providing financing for a buyer, especially if you’re in the higher-priced home sector, could essentially reduce and possibly eliminate your capital gains to “0.”  

Moreover, you could receive an excellent interest rate return from your prospective purchaser, while also saving them thousands of dollars per year on their financing costs.

This would become a win/win event with all parties benefitting. Qualifying your buyer or having your broker perform this important process would enable you to make a logical and pragmatic decision as to their qualifications.

Knowing what type and length of time they have been in business and/or the length of employment will aid in that most crucial and critical decision in becoming their lender.

Knowing the strength of the industry that they are employed in as well as the strength, profit, and loss of their business will also provide a solid basis in determining their qualifications.

Another rather new factor to consider, that has come into play that most will not consider or think about is what businesses and jobs will be affected by AI, and will have a positive or negative effect on consumer income going forward.

Some examples (quoted from by Marcus Lu),  are office and administrative support, legal, architecture and engineering, life, physical and social science, business and financial operations community and social service management, and sales and related are just a handful of industries that will be greatly impacted.

Providing longer terms for a mortgage will create a better opportunity to reduce your exposure to increased capital gains taxes.  One must ascertain an exact plan to be able to do this.

This could save you thousands of dollars as well as saving the buyer money at the same time.  The important factor is once you provide financing then your taxable income comes into play.

The more that you earn, the more capital gains you will pay.  The amount could be as much as 20% or as little as 0%.  So the plan must be set in motion to have as little “taxable” income as possible, during those years that you are providing financing, to lessen the amount of capital gains that you will be subject to over the term of the mortgage. 

This will not work for the majority of sellers, who are allowed a $500,000 exemption, plus the original cost of their purchase plus whatever capital improvement costs have been made over the years.

Total that up and then subtract it from the sale price.   Then the difference, if any, will be subject to capital gains in relation to your taxable income during the year of the sale.  But for those who figure it out and plan accordingly, it could save you a substantial amount of money.

For some, creating a specific type of trust will also minimize and reduce your exposure to greater capital gains taxes.  It is imperative to discuss all the possibilities with your CPA and financial planner as they will create a customized plan that will specifically be designed around your personal financial situation.

Another method to defer, reduce and eliminate capital gains is to rent your home for 2 years, showing the rental income and obviously paying whatever your required taxes minus expenses would entail.

One day after that 2-year period your previous primary residence is now considered your investment property and you can then execute a 1031 deferred tax exchange.  This will allow you to purchase another investment property only within the U.S.

So if you decided to retire to another state, you could search out a property nearby for easier management.  Once you close you will have 45 days to locate another property which is included in the allowable and maximum 180 days to close and take possession.

I suggest if you are looking locally or out of state, to begin your search as soon as your contract is fully executed.  This will provide you additional time to secure the most advantageous investment with the best return possible.  More information on capital gains: Internal Revenue Service – Capital Gains and Losses: capital gains info

Philip A. Raices is the owner/Broker of Turn Key Real Estate at 3 Grace Ave Suite 180 in Great Neck.  For a free 15-minute consultation, value analysis of your home, or to answer any of your questions or concerns he can be reached by cell: (516) 647-4289 or by email: [email protected] or via https://WWW.Li-RealEstate.Com

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