For many people, the aftermath of the holidays is associated with the disposal of Christmas trees, tinsel and decorations. It’s a time of year filled with resolutions and black-eyed peas, workout gear and the stress of facing those credit card statements from December.
Finding a way to save money and keep more of those hard-earned funds in the bank is a common goal for many people, especially at the start of the year. Considering all the costs and headaches that owning a rental property can bring, it is easy to see why so many investment properties hit the market in January.
The inevitable certainty of having to pay capital gains taxes will darken the mood of any investor or rental property owner. Dreams about a hefty paycheck and a nice return on all the blood, sweat and tears that have been poured into a rental property can become just that - dreams.
It’s easy to see how finding a way to reduce capital gains tax - or avoid it altogether - could quickly become an investor’s sole purpose in life.
On a positive note to start the New Year, many believe that President elect Donald Trump is likely to reduce the capital gains tax. This has many property owners interested in delaying the realization of a capital gain opting to wait and see what Trump will do.
To provide a bit of backstory, having to pay capital gains taxes is actually a good problem to have. This is because capital gains taxes only pertain to people who have had a rental property for at least a year and have made a profit on it. Tax rates vary from zero to 20 percent, depending on the taxpayer’s adjusted gross income.
Conventional wisdom holds that a 1031 exchange is one of the best strategies for avoiding the payment of a capital gains tax. A 1031 exchange is when an investor swaps out one rental property for another of ‘like-kind’ or similar value. Since the funds are held in a trust until a replacement property is identified and purchased, the investor is allowed to defer the payment of capital gains taxes.
In light of the market appreciation we have seen over the past few years, an exchange might not be the best idea for reducing capital gains taxes anymore. Instead it may be worthwhile to consider the following strategies for avoiding capital gains tax: