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Capital Gain on Real Estate Sale & How to Avoid It

Capital Gain on Real Estate Sale & How to Avoid It

October 27, 20233 min read

If you're selling your home or rental property, you've probably heard the term "capital gains tax" thrown around. It's that pesky tax that can take a big bite out of your profits. But what if I told you there are ways to minimize or even avoid it altogether? Stick around as we dive deep into the world of capital gains tax, depreciation recapture, and tax-deferring vehicles like the Installment Sale Trust.

The Basics of Capital Gains Tax

What is Capital Gains Tax?

Capital gains tax is the tax you pay on the profit you make from selling an asset, like real estate. The IRS wants a piece of that pie, and how much they take depends on how long you've owned the property and your income level.

Cost Basis and How It's Calculated

The cost basis of your property is essentially what you paid for it, including the purchase price and any improvements you've made. This number is crucial because your capital gains are calculated based on the difference between the selling price and the cost basis.

Capital Gains = Selling Price - Cost Basis

Cost basis: (Initial Purchase Price + Additional Costs + Home Improvements) - Accumulated Depreciation

Tax Breaks and Exemptions

Good news! There are some tax breaks available. For instance, if you're selling your primary residence, you can exclude up to $250,000 of your capital gains if you're single, or $500,000 if you're married filing jointly. But remember, there are conditions you need to meet, like living in the home for at least two of the last five years.

Depreciation Recapture

If you're selling a rental property, you've likely taken depreciation deductions over the years. Well, the IRS wants some of that back too. This is known as depreciation recapture, and it's taxed at a maximum rate of 25%.

State-by-State Differences

Don't forget about state taxes! Capital gains tax rates can vary significantly from state to state. Some states, like Texas and Florida, don't have a state capital gains tax, while others, like California, can take a hefty chunk. Always consult with a tax professional familiar with your state's laws. For a list of all state capital gains tax, click here.

The Installment Sale Trust: Avoid Capital Gains

What is an Installment Sale Trust?

Now, let's talk about the game-changer: the Installment Sale Trust (IST). This financial tool allows you to sell your property tax-free by deferring the capital gains over a period of time. It's a fantastic alternative to the 1031 exchange, especially for those who don't want to jump back into owning another property right away.

Liquidity and Guaranteed Income

One of the coolest features of the IST is its liquidity aspect. You're not tied down to another property, giving you the freedom to invest as you please. Plus, it pays a guaranteed 6% income every year, in addition to any trust appreciation. Talk about a win-win!

Why Choose IST Over a 1031 Exchange?

The 1031 exchange is great, but it has its limitations. You have to identify a like-kind property within 45 days and close within 180 days. With an IST, there's no rush, giving you more control over your financial future.

What Would Your Own IST Look Like?

Ready to see what the Installment Sale Trust can do for you? Head over to to input your numbers and receive a full report. You'll get an estimate on how much you could earn with an IST compared to a conventional sale. Trust me, you won't want to miss out on this opportunity to maximize your profits and secure your financial freedom.

Capital gains taxreal estate capital gainsinstallment sale trust
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