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Maximize Profits: Landlord Tax Tips for Selling Rental Property

By The HomeGo Team On 2020-01-03

Selling a rental property can be a smart financial move, especially if your profit is reinvested in future properties to help reduce or avoid taxes. If you plan to sell a rental property, a little research on tax requirements can help you avoid some of the standard tax on selling a rental property, so read on to learn how you can save.

How Much is the Tax When Selling a Rental Property?

The tax on selling a rental property depends on the capital gains you have from the sale. In 2018, for example, the rate was 15 percent for long-term capital gains for those who were married and filing jointly.

If you have that filing status and make more than $479,000 in combined income, the rate rises to 20 percent.

It’s important to note that the tax you will have to pay is based on the amount of money you made in profit from the sale of your rental property.

That would be the difference between what you paid for it and what you sold it for, minus qualifying upgrades, repairs, and deductions.

Keep Track of Common Rental Property Deductions

Operating a rental means that you can deduct business expenses associated with the property.

Common deductions include your home office, travel between properties for mileage deductions, repairs on the home, interest paid on a mortgage, legal expenses, deductions for services you hire, and so on.

The deductions for operating the property can bolster write-offs, while also reducing your overall tax liability.

How Does Tax-Loss Harvesting Work to Avoid Rental Property Tax?

One of the ways to reduce steep taxes when selling a rental property is through the use of tax-loss harvesting. This involves offsetting the capital gains with losses in another area of investment.

When you have more than one investment, you might realize a profit on one but take a loss on another.

For example, if you lose money in the stock market but sell a rental property, you could avoid paying tax on selling that rental property.

That would only work if the stock market loss was the same or more than the sale profit. While this works for some landlords, it isn’t right for everyone and isn’t always an option.

Business Structure Benefits

If you only own a single rental property or you have a few rental units, you can run it as a sole proprietor and the investments are noted on your personal taxes. After you grow to have more than a single or a few properties, housing those properties under an LLC is a common business move.

You still own the business, but each property is managed under the LLC, in which all expenses are grouped and the finances are more easily managed. The profits on a sold property can also remain within the LLC – where it’s easier to reinvest the earnings – while avoiding capital gains taxes.

Can I Take Advantage of the 1031 Exchange?

You can also avoid the tax on selling a rental property if you take the profits and put it into another rental property that is similar to the type of property that you are selling. This is called a 1031 exchange and it can be used to delay the payment of capital gains taxes.

Be warned, however; this exchange can be complicated to pull off and is not for the first-time investor.  You have 45 days to find the home and get the process started, and 180 days to close on the property.

You must use the profits to buy another property, and cannot purchase other items — such as personal property — with the money.

Would Living in the Home Reduce Taxes Owed?

Of course, this option does not work for most. If you are planning your exit from the property long in advance, you may be able to take advantage of this tax break.

If you live in the home you’re selling for at least two out of the last five years, you can deduct the two years you lived there from the amount of the profit.

In other words, if your total profit on the sale was $100,000, and you lived in the property for two years total, you would pay capital gains on 3/5ths of your $100,000 profit, or $60,000.

Save on Selling & Closing Cost

Tax breaks aren’t the only way to save money when closing on the sale of a rental property. Just like selling any other property, most selling methods involve fees and commissions that can really eat into your profits. Before you say goodbye to a part of your profit, consider selling to HomeGo.

HomeGo never charges fees or commissions so your money stays where it belongs, with you! We understand that selling a rental property can have a unique set of challenges, and HomeGo wants to work with you to overcome them.

We can purchase properties with active tenants and can work with out-of-state sellers. Ready to see how easy the process can be? Reach out to HomeGo today, and schedule a no-obligation walk-through.

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The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.