Selling a vacation home can mean more money in your pocket. But as a home investor, you have to consider tax liabilities that can eat away at your profits.
In the United States, capital gains taxes may be applied when homeowners sell their vacation rental home. You can avoid the capital gains tax on your short-term rental home when you know what steps to take to minimize your tax liability.
Deduct Your Homeowner Expenses
When you own a vacation home, there are expenses you can deduct to reduce your capital gains tax. These include the interest on your mortgage as well as insurance and maintenance expenses. As a vacation home owner, it’s important to keep records of your expenses. You may need to show receipts or other records, such as an insurance statement, in order to qualify for the deductions.
Money spent on home improvements can reduce your capital gains tax as well. Home improvement costs lower the profit earned from your home, which can reduce or eliminate any potential tax liability. For example, if you paid $500,000 for a vacation home, then made $50,000 in improvements and sold the property for $550,000, you wouldn’t own any capital gains taxes since you didn’t actually make a profit on the sale.
Unload Other Investments at a Loss
Stocks and other investments are also considered when calculating capital gains. If you sell your vacation home at a profit, other investments that decreased in value during the tax year could offset your total capital gains taxes.
For example, a loss of $10,000 in the value of investments you’ve sold would eliminate your tax liability on the sale of your vacation home if it were equal to or less than $10,000.
Know Your Taxable Income
If you have a low taxable income, you may be able to avoid a capital gains tax on the sale of your Orlando vacation home. And even if you have a higher income, you can lower the portion of your income that can be taxed by taking advantage of available deductions and credits.
Consider contributions to retirement accounts and other investments that can reduce your taxable income. Working with a financial professional can help you identify the best options for your situation, financial needs, and goals. U.S. residents should be aware that the capital gains rate is determined by your marginal tax rate. That means if your marginal tax rate is 10 or 15 percent, you won’t have to capital gains taxes.
Donations Can Lower Your Tax Burden When Selling Your Vacation Home
There are many ways to invest or spend the profit earned from the sale of your vacation home. But donating some portion of that money can reduce your capital gains tax. Claiming this deduction may not eliminate your tax liability, but it may lower it, saving you from handing over a sizable portion of your profit after selling your home.
Work with a Qualified Real Estate Professional
Replacing your vacation home with another property isn’t as straightforward as it might sound. There are rules and regulations you need to follow. For example, you won’t be able to carry out the transaction with any broker or other professional who you have worked with during the 24 months before the exchange.
It’s best to find someone with experience in real estate transactions involving the replacement of a vacation home with a similar investment property. When you understand the requirements for this type of transaction, you can avoid capital gains taxes as well as unwanted issues or delays.
Purchase Another Property Similar to Your Vacation Home
After you’ve found a buyer and sold your Kissimmee vacation home, you can use the money earned from the sale to purchase a similar property.
Home investors can avoid capital gains taxes as long as the replacement home is purchased within 180 days of closing on the sale of their first home. A real estate professional can help you find properties similar in value to your original home, and you may also use the funds to purchase a commercial property or an undeveloped lot.
Completing the Transfer to Avoid Capital Gains Tax
When the purchase of your replacement property has been finalized, you’re free of any capital gains tax liability until you decide to sell your new home.
Making sure that the transaction meets the requirements for “like-kind” exchanges as outlined by the Internal Revenue Service (IRS) is critical to protecting your financial interests.
You can inform the IRS of the transaction by completing and filing Form 8824. The form lets you provide details related to the transaction, and you’ll need to submit the form along with any other documents that may be required.
Knowing how to avoid capital gains taxes is just one way you can maximize the benefits of investing in any of the vacation homes for sale in Kissimmee, Florida.
Consult with your tax advisor or tax strategist to take full advantage of the deductions allowed by the law.
If you are seeking to complete a 1031 tax exchange by selling your vacation home and investing in another vacation home to defer your taxes, please contact us today and we can advise you how you can strategize this type of sale of your property.
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