Q: How to avoid/reduce capital gains tax on property rented for over 5 years by investing the proceeds in a financial inves
A:
Here are some strategies to potentially reduce or defer capital gains tax when selling a rental property you've owned for over 5 years and investing the proceeds:
1. 1031 Exchange: This allows you to sell an investment property and reinvest the proceeds into a "like-kind" property within certain time limits. This defers paying capital gains tax on the sale. The replacement property must be identified within 45 days and the exchange completed within 180 days.
2. Installment Sale: Rather than taking the full sale price at closing, the buyer pays you in installments over time. This spreads the gain over multiple years, potentially keeping you in lower tax brackets. You pay tax on the gains only as you receive payments each year.
3. Offset Gains with Losses: If you have other investments that have lost money, consider selling them in the same year to offset the capital gains from the property sale. You can deduct up to $3,000 in net capital losses against ordinary income.
4. Convert to a Primary Residence: Move into the rental property and make it your primary residence for at least 2 years before selling. You may be able to exclude up to $250,000 ($500,000 if married) of capital gains from your income.
5. Defer Gains in an Opportunity Zone: Reinvest the gains into a Qualified Opportunity Fund that invests in designated economically-distressed communities. This allows you to defer taxes on the gains until 2026 and potentially reduce the taxable amount.
6. Carry Over the Tax Basis: If you're selling the property to buy another rental, you may be able to carry over the tax basis to the new property to reduce depreciation recapture taxes.
Proper tax planning is crucial. I'd recommend consulting with a qualified tax professional or CPA to determine the most advantageous approach for your specific situation and to ensure you follow all rules properly to qualify for any exclusions or deferrals. Tax laws can be complex with many nuances.
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