Congrats! You’ve just sold your first investment property and are ready to reap your rewards. The only problem is, you forgot about paying that pesky capital gains tax. Capital gains tax is owed after selling a real estate property and sometimes can end up costing you a lot more than you might think.
Luckily, there are some ways to reinvest your capital gains to avoid or delay paying this tax or simply maximize your profit after paying Uncle Sam. While it’s always important to partner with an experienced real estate agent who understands investing, doing your own research is also recommended.
Before you sell your investment property, make sure you check out these five ways to reinvest your capital gains money to better maximize your profit.
1. Reinvest in Another Rental Property
Section 1031 of the Tax Code allows investors to defer all or some of the capital gains tax owed if they reinvest in a like property. This doesn’t mean the new property must be exactly the same as the previous, but rather that it must be another rental property. Purchasing a new rental investment, also referred to as a 1031 exchange, can defer most or all of this tax.
To be eligible for this exception, you have to select a new property within 45 days of selling your first rental property and close on the new property within 180 days. Meeting these dates is extremely important, so be sure to partner with a real estate agent who can walk you through the 1031 exchange process.
2. Move Into Your Rental Property
One smart way to avoid paying capital gains tax is to move into your rental property. While this typically only applies to single-family residences, it can be an easy way to live rent-free and then sell your home for a profit.
When you sell your primary residence, you’re typically excluded from paying capital gains tax on any profits under $250,000 for single filers and $500,000 for married filers. If your profit won’t exceed your filing amount, this could be your best option for avoiding the tax altogether.
You’ll have to live in the residence for at least two years to become eligible for this tax break, but it might be worth it to pocket your profit.
3. Offset Your Gains
If you have multiple real estate investments, you can often offset one of your gains with a current loss. If you lost $50,000 in real estate stocks that year but made $30,000 in profit from a rental property sale, you can offset this loss on your taxes. Since your loss was greater than your gain, it’s unlikely you’d be required to pay any capital gains tax.
4. Invest in Real Estate Assets
If you’re unable to avoid paying capital gains taxes, you can still maximize your profit by turning to passive investing options. By investing a portion of your profit in REITs, crowdfunding projects, or mutual bonds, you’ll further diversify your portfolio and could end up earning back more than you paid in capital gains taxes.
When investing in real estate projects, be sure to talk with a reputable investing expert or real estate agent, first. If you don’t have experience in investing in the market, it’s important to partner with a knowledgeable resource who can help you make the smartest investment decisions.
5. Fund a New Investment (or Two)
Even if you’re not able to escape paying capital gains tax on your investment sale, you can work to build up your portfolio and earn even more money by actively reinvesting in new rental properties. Purchasing a new rental property, flipping a home, or purchasing a multi-family home you also plan to live in are all smart ways to reinvest.
A local real estate agent can help you find the best, low-risk investment opportunities in your area, so you can maximize your capital gains.
If you still have questions on how to reinvest your real estate capital gains, get in touch with an experienced real estate agent with investment experience. Partnering with an agent can be invaluable in the investing process and will help you feel more confident in your investing decisions.
Let Clever connect you with a talented real estate agent in your area. Whether you’re buying or selling an investment property, they will save you money through a flat-fee commission or a Home Buyer Rebate.