Here are two tips to help you pay fewer taxes on your capital gains.
Are you thinking of selling your home but you’re worried that you might have to pay taxes on the capital gains that you’ve earned? The market has appreciated significantly in the past few years, so many homeowners can get significant capital gains when they sell their homes. Today I’ll tell you about a few ways that you can either avoid paying capital gains taxes or use those gains to begin investing in residential real estate.
There are two IRS laws that allow you to grow your wealth using the capital gains you earn on your home. The first law is Section 121: Exclusion. This allows you to exclude paying taxes on up to $250,000 of the capital gains you earn if you’re single and up to $500,000 if you’re married and filing your taxes jointly.
The second IRS law applies to investment real estate. It’s called the 1031 Tax-Deferred Exchange, and it allows investment property owners to take the gains they earn from selling a property and roll them over into another investment property.
“Take advantage of these tax laws to start investing in residential real estate.”
There’s a way to take advantage of both of these tax laws so that you can start investing in residential real estate. It’s called procedure 2005-14. It allows you to take the capital gains exclusion under Section 121, not pay taxes on that, and then invest any additional capital gains in residential real estate under the 1031 Tax-Deferred guidelines.
Two rules need to be met to use procedure 2005-14:
- You must have lived in your home for two of the past five years and you must have used the home as your primary residence.
- The home must have been a rental property immediately prior to the sale.
I’m a licensed residential real estate professional who works with a lot of investors, but I’m not a tax advisor. If you’re thinking about using the appreciation to start investing, I recommend that you talk to a CPA or a tax attorney for advice. I would be happy to help you look at your options for beginning to invest in real estate, so call me today. I look forward to hearing from you.
