When you invest in and later sell Palm Beach area real estate, you may realize a substantial profit, but you may also be subject to a heavy capital gains tax on the proceeds of the sale. The good news for those selling property in the Sunshine State is that there may be ways to bypass capital gains taxation. Here is what you need to know about the capital gains tax and your Palm Beach area property.
Understanding Capital Gains
Capital gains taxes are assessed on the difference between what you paid for an asset and the sales price. In addition to real estate, this tax can apply to investment assets such as stocks, bonds, and tangible property.
Primary Residence Exclusion
According to the IRS, “[i]f you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse…” However, to qualify, you must have owned your home and used it as your primary residence for at least two years in the five-year period before the sale. You also cannot have excluded another home from capital gains in the two-year period before the subject home’s sale.
The 1031 Exchange
Commercial real estate investors may be able to defer capital gains tax altogether under certain circumstances. IRS Section 1031 allows property owners who have sold a business or investment property to acquire property that is the same or “like-kind”, and not owe capital gains except to the extent that their profit exceeds the like-kind value. According to the IRS, under the recently passed Tax Cuts and Jobs Act, Section 1031 now applies only to exchanges of real property and not to transfers of personal or intangible property. Additionally, if you have sold a commercial property that was used for investment purposes, you may be able to defer capital gains tax on the sale if the funds are reinvested within 180 days.
Higher tax bracket individuals may be able to transfer some of their profits to family members in lower tax brackets to protect the sums from higher taxes. There are also ways in which charitable donations of long-term appreciated assets can bypass capital gains.
Learning about these and other ways to minimize your capital gains tax liability is a critical part of your real estate investment strategy. At Rabideau Klein, we have extensive experience handling multi-million-dollar transactions for high-end real estate in the Palm Beach area. Guy Rabideau, Esq. and David E. Klein, Esq. are Florida Board-Certified Real Estate Attorneys with the experience you need for your South Florida luxury real estate transactions. Contact Rabideau Klein today to discuss your real estate legal needs.