These days, many individuals nearing retirement and holding investment property are considering selling investment property due to the lucrative real estate market. While it may seem like a perfect time to offload those property assets and reap the profits – make sure that you talk to your tax advisor before taking the plunge, or you may be unpleasantly surprised.
Purchasing rental properties has become an extremely popular investment strategy. In fact, experts say that those nearing and past retirement age have accumulated about $6.4 million in net worth tied to those holdings. As attractive as that income is, it can also create responsibilities around rent collection. Also property management loses it appeal pretty quickly. It’s no wonder that between those responsibilities and skyrocketing valuations, many people are looking to get out.
How to Minimize Tax Implications When Selling Investment Property
While a sale now makes perfect sense, it’s important to go about it the right way to minimize taxes. There are a variety of tax-planning strategies that will provide you with significant benefits. These include:
- A 1031 exchange. This option would mean exchanging the property that is currently owned to deferring the capital gains. The rules for a 1031 exchange are that you must identify the replacement within 45 days. And you must complete the exchange within 180 days.
- Investment in an Opportunity Zone. This option allows investment property owners to sell their property. They then roll their gain on it into the Opportunity Zone Fund. Doing so provides tax-deferred growth over the next four years.
- Transfer the property to a charitable remainder trust before it is sold. This process exempts the gain from capital gains tax and allows it to be reinvested. In a transfer, the original owner receives the income during their lifetime. And the balance transfers to the charity after they die.
- Holding off on selling until a low-income year. As tempting as it may be to take advantage of the current market, consider holding off until after retirement. That is when your income is lower and the tax hit may not be as extreme.
Please Note
Rather than jumping into a sale based on your impulse to maximize your profit – heed these recommendations.
- Give consideration to the tax implications
- Take a measured approach to provide the greatest long-term benefits.
At the very least learn what you can do minimize the tax consequences that would inevitably follow significant gains. Even your Medicare costs can be affected by a big gain, so careful planning is a must.
Do you own an investment property and are considering selling that investment property? Take a bit of time to check in with our experienced tax advisors. We’ll provide you with guidance on how best to leverage your position.
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