Tax Savings for Sales of Real Estate
By Craig Pellet, CPA
Big asset liquidation events can come with a big tax bill.
Real estate is one of the most significant drivers of wealth. When it comes time to sell, managing the tax due is a top consideration. Here are a few ideas to reduce or defer the tax.
Document your improvements
Remember that you only pay tax on the difference between the sales price and your investment in the property. That includes not just your original purchase price, but also any improvements you made along the way. Costs incurred for major renovations like remodeling a kitchen down to smaller improvements like replacing light fixtures with new and improved ones reduce the taxable gain.
Save tax on sale of a primary residence
If you are selling your primary residence you can generally exclude $250,000 of gain, or $500,000 of gain for married couples. You must have made the house your principal residence for 2 of the 5 years immediately prior to the sale.
If you are selling a residence that isn’t your principal residence, consider moving into that residence for 2 years prior to sale. You’ll generally qualify for the $250,000 or $500,000 exclusion.
Make a like-kind exchange
If the property you are selling is an investment property (generally, not your residence), you can exchange one property for another piece of real estate, usually via an intermediary. So long as the sales proceeds are fully reinvested, the tax is deferred until the sale of the replacement property. The properties need only be real estate, but share no further similarities. It is ok to exchange a residential rental property for a commercial building, or even vacant land.
Reinvest gain in a QOF
Taxpayers can invest the gain on the sale of real estate (also stock!) into a Qualified Opportunity Fund, or QOF. The gain becomes taxable in 2026. You need only invest the gain, not all of the proceeds, so it would be possible to pocket your original basis in the real estate, while investing the excess in a QOF. If you hold your interest in the QOF for 10 years, your gain on the sale or liquidation of the QOF is generally tax free.
Donate to a CRUT
You can also defer tax on the sale by donating the real estate to a special trust, called a Charitable Remainder Unitrust, or CRUT. You’ll get a charitable deduction for making the donation. The CRUT can sell the property and incur no tax. You retain an income stream from the trust, usually 5% to 10% of the value annually, and pay tax on that income. At the end of the term, or at your death, the trust goes to charity. There are estate tax benefits too, since the trust is not part of your taxable estate. This requires lots more administration. A lawyer is needed to set up the trust. And the trust must file a tax return each year. However, this can be a powerful benefit for deferring tax on large gains while keeping the benefits of investing the proceeds.
At John Schachter + Associates we help our clients minimize the tax they owe on real estate sales. Talk to us. Let us know how we can help you!
