Managing Capital Gains when Selling Real Estate

KEY WEST, Fla. - March 30, 2015 - PRLog -- Per Fred Mullins, Top Producing Member of Team Mullins at Coldwell Banker Schmitt, "Real estate can be a very powerful investment vehicle. It possess inherent value simply because land is finite and the improvement, gains more value the longer it’s held. Unlike single stocks, real estate isn’t normally subjected to wild market fluctuations. Though there are times when depreciation does occur, these are quite brief relative to the longevity of overall upward trends.

Investors choose real estate as an investment for these very reasons. It offers much more stability and has the ability to generate passive income that’s payable on a monthly basis. Unfortunately, selling real estate comes with a price. The Internal Revenue Service levies a tax penalty on any profits, which are known as “capital gains.” Put simply, the IRS classifies this type of transaction as a form of income, but that doesn’t mean there’s no way to avoid the capital gains tax penalty.

How to Avoid Capital Gains when Selling Real Estate

If you are clever enough, you can avoid the capital gains tax when selling real estate, you just have to find a solution that best fits your own situation. Should the home be your primary residence, you won’t have to do much of anything. Individuals are allowed under IRS rules to sell their primary residence without paying capital gains on transactions of $250,000 or less. You can double that amount to $500,000 if you’re married and selling your primary residence.

Should this be an investment property, you’ll have to go another route. Here are some other ways of avoiding capital gains taxes on the sale of real estate:

Roll the proceeds into another property. You can use what’s known as a 1031 Exchange to avoid both capital gains and depreciation recapture taxes. It has to be a similar type of investment and must be done within 180 days.

Sell a renovated primary investment residence. That sounds complicated, but it’s not that difficult to understand. If you’ve purchased a residence that’s under market value to move-in and renovate to sell and realize a profit, you’re protected under the primary residence rules. It still has to sell for under $250,000 if you’re an individual and under $500,000 if you’re married.

Use a stock exchange. Much like the 1031 exchange, this cottage industry wouldn’t exist without the heavy hit of capital gains. If you have highly appreciated securities, meaning stocks, you can exchange the sale for other investments. This isn’t cheap, but it’s not as expensive as paying capital gains.

There are more ways to avoid paying capital gains. One of them is to leave the property to heirs who can use the step-up cost basis to shield against paying taxes. You should always consult a professional tax advisor for advice when selling real estate

Fred Mullins has more than 16 years of cross functional experience in real estate, international asset management and construction management. He has been a part of the management team for several Fortune 100 companies, including AT&T, Visa, FPL and C. B. Richard Ellis.

His responsibilities have included real estate / property management portfolios of more than 9 million square ft. and international responsibilities in more than 10 countries.

Fred holds an MBA, B.S., real estate license, mortgage broker’s license, USCG Master Captains license and commercial pilot’s license and is the owner of www.lowerkeys-homes.com serving the lower Florida Keys.