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Capital Gains Tax

Capital Gains Tax is a tax paid on the profit from the sale of any investment or real estate.

If you buy a new home and decide to rent out your previous home, capital gains tax could be an unintended consequence. If you have not lived in the residence for 2 of the last 5 years, when you sell that property capital gains are figured from your original cost of the property, not the value when you converted it to a rental property.
So, if your rersidence has increased significantly in value, if you convert it to a rental, all of that increase could be taxable when you sell.
You may be better off to sell that property and buy one to rent out. Another advantage to this is you can pick a property that may be better suited for renting.
Consult your tax professional before converting a primary residence into a rental.

When using the 1031 exchange you are not able trade down in value - you must use your equity to trade up. Many investor will use this strategy to move up to large properties until they have their ideal property for cash flow such as a large apartment complex.

Captial Gains Tax can often be referred to as CGT

The rate that you are taxed can depend on many factors including the length of time that you have owned the property (or investment). The longer you have the property the lower the tax rate on the gains.

Even with prior experience its important to seek the advice of a professional who deals with capital gains taxes. The last thing you need is an expensive mistake.

There are several strategies for deferring the taxes on capital gains, including a 1031 exchange.

Or if you prefer, call for a personal referral to a reputable CPA in your area.

Primary residences may be exempt from a capital gains tax if it meets certain criteria

Contact your personal tax advisor or CPA for additional information about capital gains taxes.

You can receive an exemption on capital gains if you have lived in the home as your primary residence for 2 years. You can be exempt for $250,000 if you are single, and $500,000 if you are married.

By holding a property for over a year, you can sell it and treat the profit as a long term capital gain. This could reduce your tax liability from 33% to 15%. See your tax professional for complete details on your situation.

With the Taxpayer Relief Act of 1997, married tax payers, who file jointly, get to keep $500,000 in profit on the sale of a home. The law applies to the sale of a personal residence after May 6, 1997, and allows the exclusion to be claimed once every 2 years.

The Taxpayer Relief Act of 1997 does not mean to the homeowner that you must have lived in the home for all 720 days out of 1800 days (2 out of 5 years). So long as the home is considered your primary residence, despite brief vacancies due to travel, you may still claim the tax break. If you have to leave for an extended period of time, say 2 years on a relief mission for a non-profit organization, as long as you sell within 5 years and have met the 720 day requirement you are okay.

Many investors will use a 1031 exchange as a way of avoiding Capital Gains Tax.

The 1031 Exchange allows you to rollover the equity from your investment property to the new property avoiding any tax penalties.

If you have taxable capital gains associated with the sale of your home, you may be aable to offset these gains with any capital losses you may have from a sole proprietorship or other flow through business entity, losses in your stock portfolio, etc. Consult your tax advisor for more information.

There are very stringent timeframe requirements when identifying and closing on other properties in a 1031 exchange, so be sure that the broker you are working with has executed these transactions before. This may sound basic, but if you find that you are educating htem on the process, you should consider another broker. Company training, even from your local banks, will not fill the gaps needed to make this process flow smoothly and do what it should, avoid unnecessary tax penalties.

For more information regarding this topic, please call Mike Williams at 516-921-9000 or email