Capital gains taxes are due whenever you sell an asset for a profit. For 2015 and 2016, the capital gains tax rate is 15% for people who fall into the 25%, 33% and 35% income tax brackets. People in the 39.6% tax bracket pay 20%.
Many people employ a strategy called tax loss harvesting at the end the year, to reduce the amount they owe from stock gains; but it can also be used for rental real estate property. That's because the Internal Revenue Service lets you pair gains with losses to lower the amount you owe Uncle Sam. For instance, a $50,000 profit on the sale of a rental apartment, can be offset by a $75,000 loss in the stock market.
Section 1031 of the tax code allows investors to sell their investment (such as a rental property) and reinvest the proceeds into another property without paying tax on the gains. You can also sell a property and then acquire one or more other like-kind replacement properties - this is called a deferred exchange. You can exchange a condo for a storefront or for a three-bedroom house as long as both are real property and are located in the United States. The property has to be for rental purposes and must have generated income. A second home or vacation property will not qualify in this exchange.
Section 1031 of the tax code requires you to identify potential replacement properties within 45 days of sale, and close within 180 days.
Some people make their rental property their primary place of residence before considering selling the property. Single people selling their home can exclude up to $250,000 of the profits and a married couple can exclude up to $500,000. You must have owned your home (rental) for five years and lived in it for at least two years according to IRS requirements.
Whether you engage in an exchange of one property for another, pair investment losses with gains to offset the tax hit or convert your rental into your primary residence to satisfy minimum residence requirements for the IRS, various strategies exist to avoid paying capital gains tax.
If you have questions regarding selling your southern California rental property, please get in touch with one of the experienced real estate attorneys at The Law Office of Retz & Aldover LLP as soon as possible.