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BR Tax Group - Accounting Firm

Seek Tax Advisor Recommendations Before Selling an Investment Property

The real estate market is red hot, and plenty of folks nearing retirement and holding investment property see now as an excellent time to offload their real estate assets and reap the profits. If you’re one of them, then - tempting as it may be - make sure that you talk to your tax advisor before making that move.

Purchasing rental properties has become an extremely popular investment strategy. In fact, experts say that those nearing and past retirement age have accumulated about $6.4 million in net worth tied to those holdings. As attractive as that income is, it can also create responsibilities around rent collection and property management that lose their appeal pretty quickly. It’s no wonder that, between those responsibilities and skyrocketing valuations, many people are looking to get out.

While a sale now makes perfect sense, it’s important to go about it the right way to minimize the tax implications. There are a variety of tax-planning strategies that will provide you with significant benefits. These include:

  • A 1031 exchange – This option would mean exchanging the property that is currently owned and deferring the capital gains by identifying the replacement within 45 days and completing the exchange within 180 days.

  • Investment in an Opportunity Zone – This option allows investment property owners to sell their property and then roll their gain on it into the Opportunity Zone Fund. Doing so provides tax-deferred growth over the next four years.

  • Transfer the property to a charitable remainder trust before it is sold. This process exempts the gain from capital gains tax and allows it to be reinvested, with the original owner receiving the income during their lifetime, and the balance transferring to the charity after they die.

  • Holding off on selling until a low-income year. As tempting as it may be to take advantage of the current market, it may make more sense to hold off until after retirement, when your income is lower and the tax hit may not be as extreme.

What’s most important is that rather than jumping into a sale based on your impulse to maximize your profit, you give consideration to the tax implications and take a measured approach that will provide the greatest long-term benefits – or at the very least minimize the tax consequences that would inevitably follow significant gains. Even your Medicare costs can be affected by a big gain, so careful planning is a must.

If you own an investment property and are considering selling, take the time to check with our experienced tax advisors. We’ll provide you with guidance on how best to leverage your position.

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“Bernard and his team at BR tax group are top notch. This is my first year using them after switching from a different local CPA and I didn't realize how much tax info I've been missing. His communication is great. The additional information he provides to maximize tax savings is something I didn't get from my previous CPA. Thanks Bernard”

Philip Ivey

Frequently Asked Questions

You can prepare your taxes yourself, especially if your business is simple.

But once you have contractors, employees, business loans, equipment purchases, mileage, mixed expenses, or growing revenue, things get more complex. At that point, tax preparation becomes a way to make sure your business is reported correctly, your deductions are handled properly, and your records can support what you file.

Send anything that shows what your business earned, spent, bought, paid, borrowed, or changed during the year.

That usually means your income records, bank statements, credit card statements, payroll reports, contractor payments, loan documents, mileage records, and prior-year tax return. Also tell me about anything unusual, such as buying a vehicle, hiring someone, opening a new location, or taking out a business loan.

Messy books can slow things down. If expenses are in the wrong categories, transactions are missing, or personal and business spending are mixed together, your tax return may not show the right profit. We may need to clean things up before filing, so your return is accurate and easier to support.

Possibly, if it was truly for your business and you have proof.

Still, it is much better to avoid this when you can. A separate business bank account and business credit card make everything cleaner. They save time, reduce confusion, and make your records much easier to defend if anyone ever asks questions.

Most small business owners can deduct ordinary business expenses like software, advertising, supplies, insurance, rent, payroll, contractor payments, professional fees, travel, and some vehicle costs.

The question I usually ask is simple. Was this expense clearly for the business? If yes, we can look at how it should be handled. Personal expenses should stay personal.

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