As income gets tighter for everyone, it becomes all the more important to find ways to keep more of your money. Keep it working for you, keep it turning over in investments, and keep it from flowing away in taxes. Capital gains taxes are a big concern for real estate investors, because property is typically a capital gain when it accrues value that is then realized in a sale. And even passive income investors, those who are investing in property for rental or ongoing income purposes, can see capital gains taxes assessed on occasion.

A key factor in the tax code is how profits, which are usually taxable, can be offset with losses. This is designed to encourage business activity, and help cushion the fiscal blow investors and companies take when financial events don’t turn out quite as well as would have been hoped for. Offsetting taxable profits with losses is called tax-loss harvesting, and is a strategy that can shield income from being turned over to the Internal Revenue Service.

Another strategy takes advantage of a provision in the tax code, Section 1031, that allows taxes to be put back if the taxable income from a property sale is instead invested back into a qualifying venture. Your tax lawyer can guide you, but generally the reinvestment needs to go into the same kind of investment; so property proceeds would be put into a new piece of real estate. This lets your profits continue to work for you.

Key Points:

  • 1You can offset the gains with losses in order to avoid capital gains tax on property that is rented.
  • 2You get better tax benefits if you sell property that you own.
  • 3Homeowners need to meet certain criteria in order to qualify for a deduction.

Tax-loss harvesting, 1031 Exchanges and converting rental properties into a primary residence can help investors defer or avoid paying some or all of their capital gains taxes