Investment properties are a great way to build wealth and accumulate assets for retirement. To maximize your return on investment, it is important to carefully plan out the sale of a property and reduce potential taxes, such as capital gains taxes. Below are a few ways to reduce or eliminate capital gains taxes on investment properties in Massachusetts.
1 – Use a 1031 Exchange
If you are buying AND selling an investment property, a 1031 Exchange allows you to defer capital gains. Basically, you would be using your gain from the first sale directly to purchase the next property, and taxes wouldn’t be due until you sell that second property (assuming you don’t perform yet another 1031 exchange). There are very strict requirements to qualify for this program. Click here to read more about 1031 Exchanges.
2 – Qualify for the Primary Residence Exclusion
If you use a property as your primary residence for at least 2 out of the last 5 years, then you may be able to exclude up to $250,000 (if single) or $500,000 (if married) of the capital gains from the sale. Only one property can be considered your primary residence at any given time. Also, for multi-family properties, only the occupied portion is excluded. For instance, in a two family home with equal sized units, you would exclude half of the gains since you occupied half of the property as a primary residence.
3 – Hold Properties for Longer Than a Year
Retaining a property for at least a year will not eliminate capital gains taxes, but it will help minimize it. Instead of short-term capital gains, it would be considered a long-term gain. This will apply a lower tax rate.
4 – Reduce Your Taxable Income
Capital gains tax rates are based on your overall taxable income for the year. Therefore, reducing your taxable income can also reduce the percentage of taxes you will pay. There are a few ways to do this:
- Sell during a year where your income/earnings are low.
- Sell during the same year that you are claiming capital losses.
- Take advantage of additional tax deductions and credits.
- Make donations to charity.
- Contribute to qualified retirement plans.
Summary of Ways to Reduce or Eliminate Capital Gains Taxes on Investment Properties
These are just a few great ways to reduce or eliminate capital gains taxes on investment properties. For additional tips and tricks, be sure to work with an experienced attorney, financial advisor, accountant, and real estate agent. With the right professionals offering guidance on your investments and financials, you can maximize your earnings on various properties that you may own.