Each real estate transaction has two important dates: the date of closing and the tax due date. BeachFleischman PC makes sure that our clients are clear on the tax consequences of real estate purchases and sales, and we provide guidance on the steps that can reduce overall tax liability.
How Will Your Real Estate Transaction Be Taxed?
Real estate transactions have two important dates: date of closing and tax due date.
As we emerge from the most protracted recession in recent history, many real estate owners are happy to simply have an offer on the table. But don’t get carried away and sign a deal that can end up costing you more in the long run. By consulting a tax advisor before signing a purchase agreement, you might be able to generate an even higher return on your investment.
The real estate holding period can have a dramatic effect on the amount of taxes paid on the eventual sale of that property. When investment property is held for one year or less, any gain on that sale is taxed at ordinary income tax rates. Wherever possible, we recommend holding investment property for more than one year to qualify for the preferential long-term capital gains treatment. Currently, long-term capital gains are taxed at a top rate of 20% — roughly half the 39.6% top ordinary income tax bracket.
The next consideration for sellers of real estate is what business they are in. If the seller is actively involved in the trade or business of acquiring and selling property, then the entire gain will be taxed at ordinary income tax rates, regardless of the holding period. Similarly, if the IRS determines that the seller engaged in development activities, rather than holding the property for investment, then they could rule that transaction should be treated at ordinary income tax rates.
Rely on Experienced Real Estate CPAs
As you are contemplating or approaching the sale of real estate, whether that sale will qualify for ordinary income or long-term capital gains treatment can mean the difference between a profitable transaction and one that falls short of your goals.
Don’t wait until a transaction is in the works to discover the tax implications. Consult experienced real estate CPAs at the outside of any real estate venture to plan for the ultimate tax impact of the sale of that property. For more than 15 years, BeachFleischman has been supporting real estate owners and investors during a purchase or sale by:
- Advising real estate investors on holding periods and other key factors to achieve long-term capital gains rates upon the sale of the property
- For real estate developers, planning to lock in long-term capital gains rates through entity structuring
- Evaluating opportunities to defer gain recognition, such as through an installment sale or a 1031 like-kind exchange
- Planning for the effect of the 3.8% net investment income tax (NIIT) on the sale of real estate held for investment.
Negotiating a purchase or sale of real property is complex. BeachFleischman CPAs can help you evaluate all of the tax consequences of a potential deal and structure the transaction to provide the optimal tax positioning.
If you are considering a purchase or sale of real estate, contact us first via the submission form below.