6 Ways to Legally Avoid Capital Gain Tax on Real Estate
Step 1. Payment by Installments
One of the ways to reduce capital gain tax on real estate is by adopting the payment by instalment system. This means that you as the seller can arrange with the buyer to make the payment for the property or real estate on instalments. That means that you can make the total payment over an agreed period of time.
This way, the tax you will pay overtime will be very little compared to the capital gain tax you would have paid if the total sum was paid in bulk. However, for this method to work out you may have to involve a Lawyer to draft the agreement between you and the buyer to make sure that the terms of payment is adhered to.
Step 2. Exchange
This method is able to help you avoid payment of any capital gain and it is also known as the 1031 Exchange Rule. In accordance with the 1031 Exchange rule, you can exchange any property you wish to sell with another property without incurring any Capital gain tax since no physical cash was involved in the transaction.
For instance; let us say you bought a property three years earlier for $100,000, and three years down the line, the property appreciated to $200,000, if you can find someone who has a property that is also valued for $200,000 to exchange with. But for you to apply the 1031 Exchange rule successfully for your estate sales, the following criteria must be fulfilled;
- The Property must be of the Same Nature-: Just like the example stated earlier, if the new value of your property appreciates to $200,000, you may have to look for another house that is valued for $200,000 to make the exchange. The only issue with this is that sometimes, it is difficult to find a property that is of the same nature or value with the one you want to sale.
- The Property for Exchange Much Be Identified Within the Stipulated Period-: That means that you may have 45 days to find another property that is of the same nature with yours to make the exchange.
- Time of Transfer-: The whole transactions involved in the exchange or transfer must be done within 180 days.
- The property must be held for investment or business use-: What this means in essence is that residential homes does not fall into the category of real estates that apply the 1031 Exchange rule.
Step 3. Sales of Residence or Home Property
Capital gain tax of up to the turn of $250,000 can be deducted from you if the sale is of your residential home; but if jointly filed, you can receive a deduction of up to $500,000. Also, you can include a third party as having a share in the property. This could be your cousin or nephew and get a reduction of up to $45,000 for the person.
For this rule to apply you must also fulfill the following criteria; the owner must have owned the house for at least 5 years, and should have occupied it for at least 2 out of the 5 years. Also, you must not have filed for any residential sales within the last 2 years because you cannot claim another sale within two years period.
Step 4. Transfer in Retirement Account
Another way to invade payment of capital gain tax on the sale of your property is to invest your profit from the sales into a retirement account; though you will have to pay tax on your retirement account later, it wouldn’t be as much as the initial capital gain you would have paid. Note that some banks have a limited amount you can pay into a retirement account.
Step 5. Invest in Student’s College Account
This type of account works like the retirement account too, because you may not have to pay tax on the account until much later. If you have children or grand children that will be leaving for college at some point; you can create a Student’s College Account and channel the profit you made from the sale of your Real Estate into the account.
Step 6. Invest In Health Accounts-: You can also channel the profit you might have made from the sales of your property into a health account. This is as long as it remains the money used to pay for health bills, which would not be taxed.
There you have it. Do not forget that in applying any of the methods mentioned in this article, it will be best to consult with your account manager to help you work out the best option for you.
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