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Tax Planning and Strategies for Real Estate Transactions

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Every real estate transaction has two important dates – the closing date and tax due date. BeachFleischman makes sure that our clients understand the tax consequences of real estate purchases and sales, and we provide guidance on the steps that can reduce overall tax liability.

Taxing of real estate transactions

In periods when the market is slower, real estate owners may be happy to simply have an offer on the table. But don’t get swept up and sign a deal that can end up costing you more in the long run. By consulting with a tax advisor before signing a purchase agreement, you might be able to generate a 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 37% 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 the transaction should be taxed at ordinary income tax rates.

Partner with an experienced accounting firm

As you are contemplating or approaching the sale of real estate, determining whether the 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.

Anticipate the tax implications in advance, and don’t wait until a transaction is underway. Consult with an experienced tax advisor to plan for the ultimate tax impact on the property sale. BeachFleischman provides support to 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
  • Helping real estate developers 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. Our real estate tax advisors can help you evaluate the tax consequences of a potential deal and structure the transaction to provide the optimal tax positioning.

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If you are considering a real estate purchase or sale and would like to understand the tax benefits and consequences, let’s talk!

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