Use a 1031 Exchange to Defer Capital Gains
It's a popular way to defer capital gains taxes when selling a rental home or even a business. Often referred to as a “like-kind” exchange, this tax deferment strategy is defined in Section 1031 of the Internal Revenue Code.
To calculate your gain, subtract the adjusted basis of your property at the time of sale from the sales price your rental property sold for, including sales expenses such as legal fees and sales commissions paid.
Determine the cost basis of your assets, which is the original value of the asset, plus any improvements and minus any depreciation. Subtract the cost basis from the selling price. The resulting number is your capital gain (or loss).
You might be able to minimize the tax hit from depreciation recapture. Potential strategies include purchasing replacement property in a Section 1031 exchange, timing the sale of business property to when you're in a lower tax bracket, and investing in a Qualified Opportunity Fund.
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
Depreciation expense taken by a real estate investor is recaptured when the property is sold. Depreciation recapture is taxed at an investor's ordinary income tax rate, up to a maximum of 25%. Remaining profits from the sale of a rental property are taxed at the capital gains tax rate of 0%, 15%, or 20%.
If it's your primary residence
You can sell your primary residence and avoid paying capital gains taxes on the first $250,000 of your profits if your tax-filing status is single, and up to $500,000 if married and filing jointly. The exemption is only available once every two years.
What is the CGT Six-Year Rule? The six-year capital gains tax property rule allows you to use your property investment as if it were your principal residence in Australia for up to six years whilst you rent it out.
Capital gains are calculated by subtracting the original purchase price after closing costs plus qualified improvements made during ownership, called the cost basis, from the sale price after closing costs and fees.
If you like your rental property enough to live in it, you could convert it to a primary residence to avoid capital gains tax. There are some rules, however, that the IRS enforces. You have to own the home for at least five years. And you have to live in it for at least two out of five years before you sell it.
Depreciation recapture is calculated by subtracting the adjusted cost basis from the sale price. The adjusted cost basis is the original price paid to acquire the asset minus any allowed or allowable depreciation expense incurred.
Depreciation reduces a property's cost base and therefore impacts the size of a capital gain (or loss) upon the sale of an investment property. However, depreciation should still be claimed.
Necessary expenses are those that are deemed appropriate, such as interest, taxes, advertising, maintenance, utilities and insurance. You can deduct the costs of certain materials, supplies, repairs, and maintenance that you make to your rental property to keep your property in good operating condition.
Current tax law does not allow you to take a capital gains tax break based on your age. In the past, the IRS granted people over the age of 55 a tax exemption for home sales, though this exclusion was eliminated in 1997 in favor of the expanded exemption for all homeowners.
According to the Internal Revenue Service, allowable tax deductions on the sale of rental properties typically include many standard settlement and common closing costs, as well as title transfer taxes, which can be added to your basis in the property.
If you owned the property for less than a year, your profit is deemed a short-term capital gain and is usually taxed at the same rate as your other income. If it's more than a year, you have a long-term capital gain that is taxed at 0%, 15% or 20% depending on your taxable income.
Capital gains up to Rs 1.25 lakh per year (equity) are exempted from capital gains tax. Long-term capital gain tax rate on equity investments/shares will continue to be charged at 12.5% on the gains. On the other hand, short-term capital gains tax on shares or equity investments will be charged at 15%.
For an asset to qualify for the CGT discount you must own it for at least 12 months before the 'CGT event' happens. The CGT event is the point at which you make a capital gain or loss.
Seniors must pay capital gains taxes at the same rates as everyone else—no special age-based exemption exists.
Determine your realized amount. This is the sale price minus any commissions or fees paid. Subtract your basis (what you paid) from the realized amount (how much you sold it for) to determine the difference. ○ If you sold your assets for more than you paid, you have a capital gain.
The 90% test: At the time of sale the private company must be using a minimum of 90% of its assets in carrying on an active business in Canada.
Capital gains tax rates
Net capital gains are taxed at different rates depending on overall taxable income, although some or all net capital gain may be taxed at 0%. For taxable years beginning in 2024, the tax rate on most net capital gain is no higher than 15% for most individuals.
Though depreciation itself doesn't require former property owners to pay back their deductions, the IRS does have plans in place that are designed to recapture a portion of the property's previously claimed depreciation upon its sale.
If the fully depreciated asset is disposed of, the asset's value and accumulated depreciation will be written off from the balance sheet. In such a scenario, the effect on the income statement will be the same as if no depreciation expense happened.