Avoiding Taxes when Selling an Investment Property or Home

We all have to pay taxes on almost all income we receive, fortunately there are several tax breaks available for us to take advantage of if we legally qualify for them. This is known as tax avoidance. Our judicial system realizes that, as citizens, we should be able to take advantage of any and all tax break laws available to us without the risk of being penalized for doing so, even if we knowingly arrange our business dealings in order to qualify for particular breaks. On the other hand, there are those that outright fail to even report certain income. This is known as tax evasion which is punishable under law and can carry hefty fines and/or jail time if convicted.

When selling an investment property, there are several steps that you can take to reduce or eliminate capital gains taxes that would normally be owed to the government. If your note were to be treated as capital gains, you could face very high taxes for selling the property. These include a 5% tax for those in the 24% and under tax brackets, a 15% tax for those in the 25% and higher tax brackets, and/or a 25% tax for the sale of property that has depreciated during your ownership to offset tax credits you may have received in past years.

You can also have the property qualify for ordinary income by living on the property as your primary residence for a total of two years out of the five years prior to selling it. These two years also do not have to happen at the same time, as long as they total 24 months. If you do this, you can receive up to $250,000 (if filing as single) or $500,000 (if filing jointly) without owing any taxes. It is important to note, however, that you can only qualify for this tax break on one property every two years.

You can also reduce your capital gains tax responsibility when you involve the property in a 1031 exchange. With this law you can sell one property and invest the full amount into a new property to avoid capital gains tax. Unlike the previously mentioned law, the property does not have to qualify as your primary residence nor are you limited to a certain amount per year. As long as the entire amount goes into buying a new property in the US (so that it meets the like-kind requirement) you can eliminate these very high taxes.

Lastly, if there is a loan on the property that is restructured or amended this will spread the profit that you receive out over time, which will also spread out your tax payments. This may not eliminate your tax obligation completely, but it may lower the tax rates that you are required to pay by keeping you in a lower tax bracket, giving you time to reinvest the money into another venture that allows for protection from taxes, or will give you time to acquire a few capital losses to counteract your gain.

All of these tax avoidance methods are completely legal and will save you a great deal of money while still staying in the good graces of the IRS.