Owning an investment property can be a very exciting venture because it helps diversify your portfolio and gives you another source of income. You should be aware, though, that there are tax implications if and when you choose to 澳洲幸运5官方开奖结果体彩网:sell your property. However, you can avoid a hefty tax bill if you consider selling it and acq😼uiring a new property in a like-kind or 1031 exchange.

Below, we explore this strategy in more detail, like investing through a retirement account or converting your investment property to a primary residence.

What You Need to Know About Capital Gains Taxes

澳洲幸运5官方开奖结果体彩网:Capital gains refer to the appreciation in the value of a capital asset from the time that it was acquired or purchased. Put simply, they are the increase in value from its purchase price. Capital assets are things held for personal use or investment purposes, such as securities (stocks and bonds), precious metals, furniture, and real estate.

You incur a 澳洲幸运5官方开奖结果体彩网:capital gains tax whenever you sell a capital asset, including any investment 🤪propertie꧟s you may own. How you’re taxed depends on how long you’ve held the property:

• Short-term capital gains: These are applied to assets you sell after holding them for less than one year. You are taxed at your ordinary 澳洲幸运5官方开奖结果体彩网:federal income tax rate.
• Long-term capital gains: These apply to capital assets that are sold after being held for more than one year. Tax rates are based on your 澳洲幸运5官方开奖结果体彩网:taxable income. The thresholds are listed in the tables below:

Utilizing IRC Section 1031: Like-Kind Exchanges

A 澳洲幸运5官方开奖结果体彩网:like-kind exchange is a tax-deferred strategy that allows you to sell your investment property without incurring or triggering a capital gains lax. This strategy, which falls under 澳洲幸运5官方开奖结果体彩网:Internal Revenue Code (IRC) Section 1031, allows you to effectively postpone any capital gains by using the sale proceeds from one property to purchase another one.

Many taxpayers qualify for capital gains tax deferral under Section 1031. This includes individuals, C corporations, S corporations, partnerships, 澳洲幸运5官方开奖结果体彩网:limited liability companies (LLCs), and trusts that own business and investment properties.

To qu𒐪alify for a like-kind exchange, bo💮th properties must:

• Be used for investment or business purposes
• Be similar enough in “nature, character, or class”
• Not be a second or vacation home
  

Furthermore, all of the net proceeds from the sale must be reinvested, which means you can’t touch any of the cash, according to , CPA and tax partner of real estate services at in New York City.

Kotonya told Investopedia that structuring 1031 exchanges can be complex because of strict timelines. You have 45 days to identify any potential properties for replacement, and you must complete the exchange withi🌄n 180 days. The exchange becomes invalid, and you will lose any deferrals if you don’t meet these deadlines.

Kotonya suggested that we be conscious of using exchange intermediaries. You shouldn’t take control of any of the sale proceeds until the exchange is complete. He also warned to pay attention to the existing debt on the property. If you have debt on the property you unload, you must replace it with debt equal to or greater than it on the new property.

Timing the Sale of Your Property

One way to help you avoid paying capital gains taxes on the sale of your investment property is to be conscious of when you sell it. Selling it at the right time can help lower your 澳洲幸运5官方开奖结果体彩网:tax liability. This is especially true if yo💞u know that you have other investments that will trigger a loss.

“Triggering capital gains to offset capital losses from other sources can be a good strategy for individual taxpayers,” Kotonya 🌌said.

Converting Property to a Primary Residence

Another way to avoid triggering a tax liability is to convert your investment property to your 澳洲幸运5官方开奖结果体彩网:primary residence. For tax purposes, your primary (or principal) residence is where you live for the majority of the year. U.S. tax law sets a time frame of 24 months within five years to determine your primary residence.

If you acquire a property through a liꩵke-kind exchange and convert it to a primary residence, you must ow🧜n it for five years if you want to exclude any capital gains.

“Such a gain is further subject to pro rata discussion based on the number of years the property was used for rental versus the total number of years owned,” Kotonya said.

Investing Through Retirement Accounts

Retirement accounts like your self-directed 401(k) or an 澳洲幸运5官方开奖结果体彩网:individual retiremen♓t account (IRA) can be used to invest in real estate, notably investment properties like multifamily homes and commercial spaces. How you do so depends on the type of retirement account. Keep in mind that you don’t own the property outright. For instance, if you own one through an IRA, the account owns the property.

But you must be careful and plan accordingly. Kotonya said he urges taxpayers to consult a professional before taking any steps, especially when you plan on using your retirement accounts to further your investment goals.

Reporting and Compliance

Although you may not trigger a capital gains liability, you must report a like-kind exchange to the 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) if you want to remain compliant, and it must be done in the same tax year that the exchange occurred. This is done using , which is submitted with your annual tax return.

Yo✃u must include the following information on Form 8824:

• A description of both properties
• The dates that both properties were identified and transferred
• Whether both parties in the exchange are related and how
• The value of the property and any associated gains in the exchange

Consult a Tax Professional

Not every strategy is meant for every investor, and it can be tough to navigate through all the information and legalities on your own. That’s why it’s best to speak to a professional to determine which strategy is suited to your situation. Consider setting up an appointment with a financial advisor, tax expert, or real estate 澳洲幸运5官方开奖结果体彩网:accountant who can help guide you in the right direction.

The Bottom Line

Selling your investment property may trigger capital gains taxes. But you can avoid paying capital gains on the sale of your investment property if you do your due diligence and research ahead of time. Using strategies like the 1031 exchange can be complicated, so it’s important to seek out help. Whether this is the first tim🍒e or you’re a seasoned investor, consult a professional to avoid any mistakes and missteps.