How to avoid capital gains on sale of primary residence

Private Residence Relief

You do not pay Capital Gains Tax when you sell (or ‘dispose of’) your home if all of the following apply:

• you have one home and you’ve lived in it as your main home for all the time you’ve owned it
• you have not let part of it out - this does not include having a lodger
• you have not used a part of your home exclusively for business purposes (using a room as a temporary or occasional office does not count as exclusive business use)
• the grounds, including all buildings, are less than 5,000 square metres (just over an acre) in total
• you did not buy it just to make a gain

If all these apply you will automatically get a tax relief called Private Residence Relief and will have no tax to pay. If any of them apply, you may have some tax to pay.

Find out if you’re eligible for Private Residence Relief.

Married couples and civil partners can only count one property as their main home at any one time.

The rules are different if you sell property that’s not your home or if you live abroad.

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The profits you can make from selling a real estate investment may look good on first glance. But if you consider the U.S. federal capital gains tax (CGT) you’ll have to pay — which can be as high as 37% — there may not be a whole lot left in your pocket after you pay that tax bill.

Here’s the good news: There are many ways to reduce and/or defer your CGT exposure so you can keep a larger percentage of your profits.

1. Wait at least one year before selling a property

When you sell an asset you’ve held for less than a year, the profit is considered to be a short-term capital gain, which can be taxed at a federal rate of up to 37%.

If you sell the same asset after holding it for over one year, the profit is classified as a long-term capital gain, which has a much lower tax rate of 0% to 20%.

Holding on to a property until it qualifies as a long-term investment could reduce your federal tax burden dramatically.

2. Leverage the IRS’ Primary Residence Exclusion

You can be exempt from paying CGT when you sell a primary residence that meets certain criteria. Individuals can exclude up to $250,000 of capital gains while a married couple can exclude up to $500,000.

Under the Section 121 exclusion, you’ll have to own and use the property as your primary residence for two out of the five years immediately preceding the date of the sale. In addition, you’re only eligible if you haven’t taken a capital gains exclusion for any other property sold at least two years before this current sale.

Since this strategy can only apply to one property being used as a primary residence, it won’t benefit investors who have multiple investment properties. Moreover, you’ll need to hold onto a property for five years before you can take advantage of this exclusion.

3. Sell your property when your income is low

Your CGT rate is determined by your tax bracket, which is calculated based on your income. If you can, being strategic as to the time of sale could have a positive impact on your tax burden.

For example, if you or your spouse quit or lose a job, or if you’re about to retire – sell during a low-income year and minimize your capital gains tax rate.

This is obviously not a convenient option as you’ll hopefully be having a bumper year when you want to cash in your investment.

4. Take advantage of a 1031 Exchange

When you sell a rental or investment property, you can roll the proceeds of the sale into a similar type of investment to avoid CGT.

This is called a 1031 exchange and it is popular among real estate investors as a strategy for building wealth.

However, the tax code is very complex and there are multiple criteria you’ll need to meet. You’ll likely need to hire a professional to process the paperwork and make sure everything is properly filed.

5. Keep records of home improvement and selling expenses

If you’re selling your primary residence, don’t forget to track all the expenses associated with renovating and selling the home.

Additions or home improvements made to the property over the years (which can increase the value of the property) can also add to your basis in the property, which translates into lower capital gains when you sell.

In addition, you can deduct the expenses associated with the sale of the property to reduce the amount of CGT you have to pay.

This strategy works well for a primary residence. However, real estate investors with multiple properties should check with their tax advisors to see if they’re eligible.

6. Invest in Opportunity Zone Funds

In 2017, the U.S. government designated many distressed areas as Opportunity Zones in an effort to drive investment in housing, small businesses, and infrastructure in those regions.

When you invest in Opportunity Zones with the capital gains from the sale of a property, you can take advantage of the following tax benefits:

• Defer all capital gains for eight years if the profits are reinvested and held in an Opportunity Zone.
• Decrease the amount of any capital gains tax by 10% and 15% if the investment is held for five and seven years, respectively. (15% option is only available for investments made before the end of 2019)
• Receive a full exemption from any capital gains tax on all future capital gains from the invested funds if the investment is held for at least 10 years.

If you want to stick with real estate when reinvesting your capital gains, look for Opportunity Zone Funds that buy older buildings in Opportunity Zones, renovate them at a reinvestment cost, then manage them as rental properties – just like we do here at Lifeafar. 

This strategy is great for real estate investors who buy and sell multiple properties and generate revenues that put them in high tax brackets.

There’s no restriction on your current income level, the amount you can invest, or your state of residence. You don’t have to wriggle yourself into any tax bracket or wrangle with endless legal paperwork.

Investing in a Opportunity Zone Fund is by far the most straightforward, versatile, and profitable way to reduce your capital gains tax when you sell your property. And our team at Lifeafar can guide you through the investment process.

A not-to-be-missed investment opportunity

Here at Lifeafar, we’re excited to be negotiating several multi-million dollar real estate deals in Puerto Rico. These projects are the perfect investment vehicles for anyone with capital gains to invest in an Opportunity Zone.

These investments will be converted into hotels and vacation rental properties to benefit from the booming tourist economy on the Caribbean island.  

Want to learn how to reduce your capital gains tax by investing in Puerto Rico?

Contact us by completing the information below to discuss current investment opportunities in Puerto Rico and how you can take advantage of the full Opportunity Zone benefits by investing in projects with a projected pre-Opportunity Zone IRR of 16-19%.

IRS DISCLOSURE

TO ENSURE COMPLIANCE WITH REQUIREMENTS IMPOSED BY THE IRS, WE INFORM YOU THAT ANY TAX ADVICE CONTAINED IN THIS RELEASE WAS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING TAX-RELATED PENALTIES UNDER THE U.S. INTERNAL REVENUE CODE OF 1986, AS AMENDED. TAX ADVICE CONTAINED IN THIS RELEASE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTION(S) OR MATTER(S) ADDRESSED BY THIS RELEASE. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON THE TAXPAYER’S PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

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