how to avoid capital gains tax when selling a business

leemahen53    July 05, 2023    Avoid , Business , Capital , Gains , Selling    Comment   

In California, real property is one of the most valuable assets you can inherit from a loved one. But inheriting real estate that has increased in value over time can trigger capital gains tax consequences when you sell that piece of property. If you’re concerned about the tax consequences, here’s how to avoid paying capital gains tax on inherited property. 

When you sell real estate, if the sale price exceeds the price you originally paid for the home, you would owe capital gains tax on the difference. When you’re an heir receiving a piece of property you inherited, the IRS may qualify the property for a “step-up in basis” when it comes to tax liability. 

Avoiding Capital Gains Tax On Real Estate: How The Home Sale Exclusion Works - How To Avoid Capital Gains Tax When Selling A Business title=Avoiding Capital Gains Tax On Real Estate: How The Home Sale Exclusion Works style=width:100%;text-align:center; onerror=this.onerror=null;this.src='https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcRJsb-qjHVPw70b0jCRYdhNBp7trSjsSGj21j1DspVo_5SXtu1hFdmTAADM_aTHpYEr0pM&usqp=CAU'; />

The step-up in basis means that the IRS will use the property’s fair market value as of the date of the Trustor’s death instead of the original purchase price when calculating capital gains when the inherited property is sold. 

Capital Gains Tax 101

For example: Let’s say your parents bought a home in the 1960s for $30, 000 and by the time they pass away, that home has appreciated in value and is now worth $430, 000. Usually, you would owe capital gains tax on the $400, 000 difference between what your parents paid for the home and its current value. This imposes major tax consequences on anyone who inherits real property, which is why the IRS allows you to use a stepped-up basis. 

Imagine that you keep the real property for a few years and then sell it for $480, 000. If the stepped-up basis value when you inherited the property was $430, 000, you would only owe capital gains tax on the $50, 000 difference. The step-up in basis provides a major advantage to heirs when it comes to reducing capital gains tax.

Many heirs would like to reduce or eliminate their capital gains tax liability if possible. Here are five ways to avoid paying capital gains tax on inherited property. 

Here's How Much You Can Make And Still Pay 0% In Capital Gains Taxes

The first option to minimize or eliminate capital gains tax on inherited property is to sell it right away. If you inherit a property valued at $500, 000 and immediately sell it for $500, 000, then you have no capital gain. 

If the home value goes down and you sell the property for less than the value at which you inherited it, then you would also not incur any capital gains tax.

The IRS considers inherited property to be long-term capital gain.  The tax rate would be 0%, 15%, or 20%, depending on your income bracket. 

Ways To Beat Capital Gains Tax In The Age Of Trump

Another option to avoid paying capital gains tax on an inherited property is to use it as your primary residence. The Section 121 Exclusion allows a taxpayer to exclude up to $250, 000 (or $500, 000 on joint returns) of the capital gain from the sale if they live in the property for at least two of the five years before the sale. 

However, if you sold another primary residence within the two years prior to selling the inherited home turned primary residence, you generally won’t be eligible for this exclusion.

If you want to keep the home but don’t plan to live in it right away, you may decide to turn the property into a rental. If you later decide to sell the home, you could choose to defer paying taxes by conducting a 1031 tax-deferred exchange . A 1031 exchange occurs when you sell one investment property and purchase another with the proceeds.

Avoiding Capital Gains Tax On Real Estate: How The Home Sale Exclusion Works

If you do not wish to purchase another rental property with the proceeds, then you will be assessed for capital gains tax when you sell the rental property.

One final option to avoid capital gains tax on inherited real estate is to disclaim the inheritance. To disclaim an inherited property, you would sign a Disclaimer with your attorney and voluntarily choose not to inherit that property to avoid negative tax consequences, such as being placed in a higher tax bracket. 

 If you choose to disclaim an inherited property for tax purposes, that asset would go to the next person in line to inherit. Keep in mind that this decision is final and you cannot change your mind later.

How To Avoid Capital Gains Tax On Stocks (7 Tricks You Need To Know)

One final way to reduce your capital gains tax liability is to subtract any expenses incurred from preparing the house for sale or closing costs. For example, if you sell the home for $400, 000 and its fair market value on the date of your inheritance was $350, 000, you have $50, 000 in capital gains. But you can reduce this exposure by subtracting the closing costs of $40, 000, leaving you with only $10, 000 in capital gains. 

An experienced estate planning attorney and CPA can help you find an ideal strategy to reduce or avoid taxes after inheriting real estate. If you have any questions about how to avoid paying capital gains tax on inherited property, feel free to contact our law firm. 

The Law Offices of Daniel A. Hunt is a California law firm specializing in Estate Planning; Trust Administration & Litigation; Probate; and Conservatorships. We've helped over 10, 000 clients find peace of mind. We serve clients throughout the greater Sacramento region and the state of California.It’s an unattainable and complicated cost, but real estate investors can legally avoid or minimize paying taxes by using the following checklist of strategies.

Understanding Tax Write Offs For Sellers Of Real Estate

These earnings are tax-deductible when an individual sells an property for a profit or gain. Particularly with real estate where the buyer pays an amount that is an amount called Capital Gains Tax.

In California the long-term capital gain tax typically 32.1 percent. This includes taxation on Affordable Health Care Act (ACA), IRS (15 10 percent), California (13.3%) as well as Health Care (3.8%). This is the typical couple’s tax bracket for married couples within the 25% tax bracket.

You can reduce your capital gains obligations in the event that you’ve used the property as your principal residence. The tax exclusion is up to $250, 000 for homeowners living on their own or $500, 000 for couples, upon being able to pass the test for homeownership. The test requires being able to meet the requirements of becoming a resident of the home for two years within 5 years preceding the date of the sale.

How To Cut Your Tax Bill With Tax Loss Harvesting

Also called Starker Exchange. The tax exemption was built on the section 1030 of the United States Internal Revenue Code and was subsequently referred to as 1031 Exchange. This exemption allows taxpayers to delay the payment of capital gains on properties exchanged which are used for trade, investment, or for business reasons.

What exactly is the definition of an “exchanged property?” It is the process of rolling proceeds of the sale into a similar rental investment. Properties that are used as investment or rental properties can benefit from this exclusion.

Properties that are rental income and were used as primary residences prior to the tax year could also be eligible for exclusion under certain restrictions.

How To Avoid Capital Gains When Selling A House

Home investors who are smart buy a house that is priced below market value and then make it their main home while they make the work. Then, they sell it at a more favorable selling price, but without paying capital gains tax, thanks to the exclusion of primary residences.

It is possible to give appreciated securities to a family member who is in an income bracket that is low and receive another form of appreciation in exchange. The IRS permits if the family decides to sell the property, the tax rate of their income rate will be applied instead of yours.

The tax rate will be based according to the income bracket of each individual. If, during the year that you sell the property, the family member falls in the 10 to 15 percent tax bracket for ordinary income the person could get away with capital gains tax completely.

How To Avoid Paying Capital Gains Taxes When You Sell Your Home (part 2 Of 3)

If you’re an investor and sell securities for a loss during an upcoming year could be used to reduce capital gains. It is possible to use losses in value of those Mutual funds to lower the liabilities of those securities that have realized gains.

If you donate the appreciated stock to a charity, without selling the shares, you receive the price to deduct tax and the charity does not have to have to pay any tax when selling the stock.

The above list of ways to minimize capital gains. It was that was compiled by an old-time Foster City resident as well as Intero Realtor, Gwen Chua. He works in conjunction with San Francisco Chapter of the California Society of Tax Consultants (CSTC) to assist sellers defer or reduce the tax on capital gains they pay.

How To Avoid Capital Gains Tax When Selling A Home!

If you’re looking to find out the value of your home and to get more value when selling your house, Gwen is a well-established agent in the real estate industry that specializes on Foster City, Redwood, San Mateo, Millbrae & South San Francisco properties. He takes continuing education classes at members of the San Francisco Chapter of the California Society of Tax Consultants each month. CPAs, accountants, CPAs, and EAs attend these meetings and share an abundance of knowledge and knowledge.

Gwen is a seasoned agent in real estate business