According to Robert Tweed, Real Estate can be a viable investment opportunity whether you buy and fix up houses for resell or purchase properties in a market turnaround. You invest your time, money, and effort on a property to increase the value as much as you can. When you reach the point that you want to realize your profits and sell the property, that pesky three-lettered word comes into play, Tax.
Taxes are a complex subject and the codes and rules change from year to year when it comes to real estate properties. Are there any tools at the investor’s disposal when it comes to maximizing profit and lowering taxes owed? Yes, Robert Tweed states, there is and that tool is called Tax Deferral and we’ll cover how this works below.
What Is Tax Deferral?
Real Estate expert, Robert Tweed explains. Tax Deferral is when you legally hold-off or delay payment of taxes owed to a later date or a future tax year. In the simplest of terms, let’s say that you sell a property and realize a $25,000 profit on the property. You would normally be subjected to Capital Gains Tax which varies by state as to the percentage taxed on the profit. If you get those taxes deferred, you won’t have to pay those taxes until the next tax year or possibly even longer depending upon your tax situation.
Or better yet, you could offset those capital gains tax with a tax credit the following year which is also dependent upon your tax situation from year to year. The name of the game in paying the least amount of tax is planning, tax planning is a subject that could easily take up a whole article on its own. We’ll look at a couple of ways that you could get those taxes deferred on your tax return.
Installment Sales are a good way to defer your capital gains tax to another tax year, Robert Tweed says. Installment Sales are when the buyer of your property elects to make installment payments to you in lieu of complete purchase of the property at point of sale. This stretches out any profit that you would normally make at the sale of a property over a course of years. Those property owners who offload via “sale by owner” are the ones who take advantage of this method the most.
Another method to use in terms of tax deferred Capital Gains Tax is to employ a 1031 exchange. This exchange is a “like-kind” exchange which requires the investor to re-invest profits from a sale into another property which is similarly-priced. This exchange must happen within six months of the original sale and it also must go through a Qualified Intermediary such as a broker or real estate agent. This method defers the capital gains tax until the new property is sold at a later date.
These are just a couple of ways that you can defer taxes on your Real Estate profits. You can learn more about tax deferrals and real estate investing by contacting Robert Tweed today.