TAX FREE PROFITS OR TAX DEFERRED PROFITS

FROM THE SALE OF REAL ESTATE

THERE IS A BIG DIFFERENCE 

By Amy and Morrey Shifman  

Let there be no question, if you can ever realize profits free of income taxes, do it!

If you ever realize profits that you can defer the income taxes on, consider it. 

The profits from the sale of a personal residence, that has been your residence for at least 2 of the last 5 years, is tax free up to $250,000 if you file a single tax return, and up to $500,000 if you file a joint tax return. This actually means that you can “earn” up to $250,000 or up to $500,000 completely tax free every 2 years on the sale of you personal residence No strings attached. The profits, if any, in excess of the $250, 000 or $500,000 are taxed as capital gains. There is no other choice available for the profits on the sale of your personal residence. There is no longer an opportunity of deferring the profits. 

The profits from the sale of investment real estate is another issue altogether. You have a choice of recognizing the gain, usually as capital gain, or you can also defer the gain by investing the sale proceeds into another real estate investment property(s). There is a time frame in which the reinvestment must be done. You must identify the replacement property(s) no later than 45 days from the close of the sold property, and you must close on the identified property(s) no later than 180 days from the close of the sold property.(The 180 days includes the 45 days). This transaction is referred to as a 1031 exchange because it is spelled out in section 1031 if the IRS Code. 

It is recommended that you use an experienced intermediary to handle the sale and purchase of your investment property(s) because it is a very complex transaction. Since it is essential that you follow the IRS rules exactly, you do not want to attempt this transaction on your own.  

Investment property can be land for land, rental for rental, or a combination of these. The major intent here is that it must be investment property. You cannot defer the profit on your personal home, only on property(s) held exclusively for investment. The profits deferred will reduce the tax basis of the replacement property and therefore your profit will be taxed when you sell the replacement property(s). You can continue to purchase replacement property(s) with the proceeds of sold investment property(s) over and over. 

Might it be to your advantage to recognize the profit and pay the tax on your investment property(s), yes it might. If your tax rate is lower this year than it will be in future years, consider paying the tax at time of sale. If the property being sold is fully depreciated, you might consider paying the tax at time of sale in order to get a higher tax base for depreciation. 

We hope the above is helpful to you, and ask that you please consult with your own tax advisor to see if they apply to you. 

Should you have any general questions about the above please feel free to contact Morrey or Amy Shifman.   

By Morrey Shifman,(CPA, Ohio, Retired) Licensed Real Estate Sales Professional.