Maximize your tax savings with these 3 options for selling your investment property

Every investor at some point asks: “Should I sell my investment property?” Whether preparing for retirement or considering cashing in on a hot seller’s market before it cools, you may want to look at all of your options. There are some important things to consider when selling an investment property and some options that can help you maximize your tax savings.

Here are my recommended top three options for selling your investment property.

1. 1031 Exchange

Using an option to sell your investment property 1031 Exchange, A 1031 exchange allows you to essentially swap your investment property for a property of the same kind while deferring capital gains taxes. This option will not net you cash like a standard sale and comes with some strict rules and IRS regulations. However, if you are nearing retirement, using a 1031 exchange is an excellent option when planning your estate.

Overall, you save money on the sale and purchase of assets by eliminating capital gains taxes. If you hold on to the property and add it to your estate, your heirs will not be liable for deferred capital gains tax. Essentially, your heirs can sell the property without paying the taxes owed on the original 1031 exchange.

Benefits of 1031 Exchange:

• deferred capital gains tax
• cash flow from tenant rent
• asset appreciation
• increase in purchasing power
• estate planning

2. Opportunity Zone Fund

If you are using any tax deferral strategy for your investment properties, you may face a significant tax liability when you sell your investment property. If you want to sell your investment property without giving up all of your past capital gains liabilities, you may want to explore investing in one. Qualified Opportunity Fund (QOF),

2017 Tax Cuts and Jobs Act had made worthy opportunity zone (QOZ). These “zones” were created to encourage taxpayers to invest in low-income communities in exchange for tax cuts. Investing in QOZ allows investors to potentially avoid and reduce capital gains on their investments by transferring their capital to a Qualified Opportunity Fund (QOF).

The tax benefits you get on your QOF investment will depend on how long you hold it. If you hold out on your investments in a QOF for 10 years, all capital gains tax can be permanently eliminated.

Benefits of an Opportunity Zone Trust:

• estate planning
• Maximize Unused Discounts
• After five years, the QOF investment grows to 10% of the deferred profit.
• After seven years, the QOF investment grows to 15% of the deferred profit.
• After 10 years, you may be eligible to pay zero tax when a QOF investment is sold or converted
• deferred capital gains tax
• tax-free nature of investment

3. Charitable Remnant Trust

Another option for selling your investment property is to transfer your investment property to a Charitable Balance Trust, This option is tax-free, meaning you not only reduce your estate taxes but can sell your assets through the trust at any time without paying any capital gains tax. You can reinvest the money from the sale back into the trust, which will then serve as a passive source of income, reducing your tax obligations.

For those who enjoy philanthropy or who do not have heirs to pass their assets down to, a charitable remainder trust can be an excellent option for your estate planning. When the trustor passes away, the remaining funds in the trust will be given to a specified public or private charity.

It is important to note that a charitable remainder trust is irrevocable. This can be both an advantage and a disadvantage. By transferring assets to a charitable remainder trust, you are essentially removing your ownership rights over those assets. This can be beneficial because it removes those assets from your property. You won’t have to pay taxes on the money and can still be paid income from the trust. It can also be a disadvantage because irrevocable trusts can be extremely difficult to modify or terminate because you don’t technically “own” the assets inside the trust.

Advantages of Charitable Balance Trust:

• tax-free irrevocable trust
• lowers your taxable income
• Can provide passive income to one or more non-charitable beneficiaries for a specified period
• Trustor is eligible for tax deduction
• donates the money to a specific charity upon the death of the trustor

conclusion

Owning an investment property can be a lot of work, and sometimes it’s easier to cash in and sell. However, before making a rash decision, be sure to consider all your options. Certain strategies can help you continue to benefit from your investments while avoiding costly tax payments.

It is wise to have a meeting with your wealth management team and financial advisors for any major financial decision. Whether you choose to sell or use one of the alternative strategies listed above, you will need the assistance of your team to better understand the tax liabilities and financial implications of each option.

Note by BigPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.