The IRS tax rules are complicated. It's difficult to precisely know what the ruling would be in so many cases, with all the changes between state, local, and government tax rules. You do need to understand them before selling real property. There are, of course, different categories of earned income, whether it be capital gains or interest income, or wages. All of which have separate tax rules.
The wealthy know the difference in the varying income categories and have paid professionals to advise them. One area they make great strides in is when dealing with real estate. The wealthy buy real property and hold for years, rarely ever selling. This hold technique allows the rich to take advantage of loans against the property, which are never considered income. As a loan reduces in balance and the appreciation of the property is gained, they simply take another loan. All the while, the revenue received in these loans is not considered income. Therefore, these dollars are never taxed, and let's just remember that real estate pretty much always increases in value while you and/or your renter are reducing the balance of the loan against the property. So, this is a nearly never-ending cycle of increased wealth that you can pass down from generation to generation!
If the wealthy must sell, they always consider the tax burden. Another way the rich reduce, eliminate, or drastically postpone the tax burden of selling real estate is by doing a 1031 exchange. Previously allowed on personal property like planes, trains, automobiles, and boats, these properties are no longer covered under the 1031 tax exchange rule (at least to my knowledge). It is, however, still available on real property. A 1031 exchange allows one to sell the real property and reinvest those proceeds in the same kind of property within a given time. If done so correctly and through an Accommodator, the tax burden is transferred to the next property, therefore never actually realized, so you are still never actually paying gains on the appreciation of the sold property.
Another great option, if at all feasible, is to simply make the property your primary residence for 3 out of the last five years before selling. This option has a tax exclusion of $250,000 for an individual or a $500,000 exemption of appreciation for married couples. The final possible solution would be to sell the property but carry back the loan privately. This option should allow you to spread your gains over many years as you receive the payments.
As with any advice, always consult your CPA or tax professional before making any moves financially. Your CPA is much better situated to answer these questions. Still, I love getting the solution machine running in my brain, which always concludes with a better turnout than simply doing the most straightforward thing possible.
You can apply this thinking to any Real Property. If you do not currently own Real Property, perhaps this helped you start thinking about creating generational wealth with real estate. Which is our opinion, is the absolute best vehicle for wealth building. Your CPA can always contact me to work together as your team to help you achieve these goals.
I'm always available to chat and encourage a conversation. I'm Dave O'Hara, broker of About Redlands Realty and Loan. Contact me to work together to create generational wealth for your family today.
The IRS tax rules are complicated. It's difficult to precisely know what the ruling would be in so many cases, with all the changes between state, local, and government tax rules. You do need to understand them before selling real property. There are, of course, different categories of earned income, whether it be capital gains or interest income, or wages. All of which have separate tax rules.
The wealthy know the difference in the varying income categories and have paid professionals to advise them. One area they make great strides in is when dealing with real estate. The wealthy buy real property and hold for years, rarely ever selling. This hold technique allows the rich to take advantage of loans against the property, which are never considered income. As a loan reduces in balance and the appreciation of the property is gained, they simply take another loan. All the while, the revenue received in these loans is not considered income. Therefore, these dollars are never taxed, and let's just remember that real estate pretty much always increases in value while you and/or your renter are reducing the balance of the loan against the property. So, this is a nearly never-ending cycle of increased wealth that you can pass down from generation to generation!
If the wealthy must sell, they always consider the tax burden. Another way the rich reduce, eliminate, or drastically postpone the tax burden of selling real estate is by doing a 1031 exchange. Previously allowed on personal property like planes, trains, automobiles, and boats, these properties are no longer covered under the 1031 tax exchange rule (at least to my knowledge). It is, however, still available on real property. A 1031 exchange allows one to sell the real property and reinvest those proceeds in the same kind of property within a given time. If done so correctly and through an Accommodator, the tax burden is transferred to the next property, therefore never actually realized, so you are still never actually paying gains on the appreciation of the sold property.
Another great option, if at all feasible, is to simply make the property your primary residence for 3 out of the last five years before selling. This option has a tax exclusion of $250,000 for an individual or a $500,000 exemption of appreciation for married couples. The final possible solution would be to sell the property but carry back the loan privately. This option should allow you to spread your gains over many years as you receive the payments.
As with any advice, always consult your CPA or tax professional before making any moves financially. Your CPA is much better situated to answer these questions. Still, I love getting the solution machine running in my brain, which always concludes with a better turnout than simply doing the most straightforward thing possible.
You can apply this thinking to any Real Property. If you do not currently own Real Property, perhaps this helped you start thinking about creating generational wealth with real estate. Which is our opinion, is the absolute best vehicle for wealth building. Your CPA can always contact me to work together as your team to help you achieve these goals.
I'm always available to chat and encourage a conversation. I'm Dave O'Hara, broker of About Redlands Realty and Loan. Contact me to work together to create generational wealth for your family today.
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