Taxes are a significant motivator for buyers and sellers in real estate, and we wanted to further discuss some of the tax implications for buying and selling.
Read more below, or watch this short video!
First, a disclaimer: We are not CPA’s or tax consultants, please contact a tax professional or CPA to confirm all details or tax implications.
However, we often interact with CPAs and other tax consultants who are involved in our clients’ real estate transactions. This is especially true within our local market on the Outer Banks, which consists mainly of investment property buyers and sellers. Taxes are not always such a bad consequence for sellers; it simply means a seller made money if they are paying taxes.
Depending on certain factors such as your income tax level, the typical capital gains tax rate for selling an investment property falls between 15% and 20%. An example, if you purchased an investment property (land or home) for $500,000 in 2023 and then sold it for $600,000 in 2024, you would owe taxes on the $100,000 gain. For simple math, 20% of $100,000 is a $20,000 tax expense or cost. This is only an idea of this tax cost for what an investor might pay in taxes when selling an investment property. There are other factors likely to influence the taxable amount of the $100,000 in this scenario, such as the amount of depreciation an investor may write off each year. This can significantly impact the taxes owed upon selling an investment property.
When selling real estate, there are several other expenses besides taxes, but we are only discussing the tax cost in this scenario. A common strategy borrowers use to avoid taxes is selling a current investment property and purchasing a new investment home of equal to or greater value by completing what is referred to as 1031 exchange. A 1031 exchange involves purchasing a new investment property of equal to or greater value within 6 months upon selling a current investment property. An investor is required to identify the property or properties they would like to purchase in the first 45 days of the 6 months to close on the 1031 exchange transaction after selling their current property.
Also, the proceeds from the sale of their current investment property must be deposited with a 1031 intermediary firm, as the funds must never be deposited into a personal account for a 1031 exchange. The purpose of the 1031 exchange in our example is to avoid paying the capital gains tax of $20,000 and purchase new real estate. We often work with the Realty Exchange Corporation with Jeff and Bill Horan. Bill’s father began advising on 1031 exchanges with Drew as far back as the late 80’s. Many realtors, builders, and mostly importantly attorneys have worked with Jeff and Bill Horan over the past years. They operate as the qualified intermediary to ensure you transaction is IRS compliant. Click the link to view their website Realty Exchange Corporation
Another option to avoid taxes in a real estate transaction is to sell your primary residence. If you have lived at the property for 2 years, then there is no capital gains tax for an individual up to $250,000 and if married up to $500,000! If you have a larger gain than $500,000, then a seller would pay the normal capital gains amount of 15-20%. Still, a $500,000 gain and no taxes paid is a significant tax savings when selling real estate! If you are considering your next real estate purchase, please give us a call or email us back!
Alex Wright, First National Bank-Home Mortgage Banking Specialist
NMLS# 1615455
Cell: 252-256-1050-Available on Weekends
5405 N Croatan Hwy. Kitty Hawk, NC 27949