Posted by The TaxAdvocate Group, LLC

Is Capital Gains Tax on Home Sale Unavoidable?

Is Capital Gains Tax on Home Sale Unavoidable?

With your appreciated stock investment, you can trade shares for several years to expand the capital gains. But with real estate investment, it is another ball game entirely as you are not given such luxuries. The entire monies are to be claimed on all your taxes the same year the property is traded with real estate. 


An investor who utilizes Code Section 1031 to ascertain a “Like-kind” exchange when trading the investment property, capital gains can be postponed by buying a similar property for investment. 


It is possible to mitigate the tax challenge by monitoring the year when the title and ownership get out of your possession, which is when you announce the capital gains on the deal. This means you can set the handover of property ownership to a year you are supposed to have reduced tax burdens. 


The IRS insists that some or every net capital gain can be taxed at 0% if your chargeable revenue is below $80,000. If you don’t have an active income with least passive income and the gains on the property sales, you can evade giving taxes on the minimal capital gains. 


But if your income is stable and disbursing taxes on the gain seems unavoidable, then you may have to use the IRC Section 1031. 


The IRS also has its Section 1031 on exchange that allows investors to trade real estate held as an investment for supplementary investment real estate without incurring tax problems. Under Section 1031, if you interchange investment property or business for another similar company or investment building, the gains or losses will not be documented until the recently purchased property is disposed of. 


From 2018, the Tax Cuts and Jobs Act restricted similar exchanges to real estate. Then the Section 1031 exchanges of private property like artworks are now prohibited. 


The IRS Section 1031 does not permit the evasion of capital gains tax in every case. For instance, the interchange of U.S real estate for a property in another nation doesn’t qualify for a tax-delayed exchange position. More so, trades that involve personal use property, like exchanging a private residence for a lease home, wouldn’t get tax-deferred action. If an exchange is completed between connected parties and the parties dispose of the switched real estate within two years, the traded property will be answerable to tax. 


To report taxes, the prior property will be moved over to the latest property: this is crucial because due taxes are not forgiven; they are suspended until the trade of a new property. For anyone to record Section 1031 with the IRS, it is vital to file Form 8824 and tax return aimed at that year’s similar exchange. Also, file for each of the 2 years after the sale. 


For a tax-deferred exchange deal to happen, some conditions must be fulfilled: 


  • The building must be a similar one which means it must be like the other property in grade and excellence. 

  • The building should be connected to investment or business; this means the primary property must be resold. 

  • The fresh building must be recognized within forty-five days. 

  • The transfer is supposed to happen within a 180-day frame. 


The high amount of real estate sales has permitted people to get satisfactory tax dealing from the American government. This has resulted in lots of tax revenues getting lost. At present, Section 1031 exchanges for the building remain accessible but will be removed for added kinds of properties like aircraft, collectibles, and heavy equipment. 


Please discuss your property plans (sales, purchase, or rental) with a tax expert to know the exact tax rules that relate to your particular real estate investment. 


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