Taking the Right Steps When Selling Your Central Florida Investment Property
SHOW ME THE MONEY…… Sometimes, the only move to make in the market is to sell. The good news is that, if you played your cards right, you might be sitting on a whole lot of equity. The bad news is that if you don’t play your cards just right, you can wind up being on the hook for those profits when tax time rolls back around. According to Riley Adams, CPA, this is where some landlords take a big hit.
3 Things to Tax Things to Know with Your Rental Property
The rental property owners, living in Central Florida, who decide to sell can virtually eliminate their taxes owed — but only if you reinvest in another property of greater or equal value. There are limits to taking advantage of what is known as Tax-Free or Like-Kind exchanges. Here’s what you need to know to take advantage of this perk.
1) IRS Code Section 1031: If you’re looking for a tax-free real estate exchange, then IRS Code Section 1031 is your portfolio’s best friend. Using this option, you’ll reinvest in a like-for-like transaction and avoid any capital gains taxes. Unless you happen to be a licensed tax professional, you’ll want to work with a lawyer or advisor. Funds must be placed in escrow after the sale. After that, you’ll erase 45 days to select the new property and six months to make it to the closing table. Because of these deadlines, smart investors start looking for their next property well before they put the current home on the market.
2) This Means You Can’t Pocket the Proceeds: In case you missed it, the only way to avoid that capital gains tax is to reinvest and to do it fast! If you’re only thinking of selling your home because you’re looking to wash your hands of the responsibility of keeping up with it as a DIY landlord, you might be better served to enlist the services of a management firm and keeping the property in your portfolio. If you’re selling to put those proceeds in your checking account, you’re sore out of luck. You’ll be responsible for any equity and also any depreciation you’ve claimed!
3) Keep Meticulous Records: There’s always a risk that for one reason or another, your return will be the one that catches that auditor’s eyes. If that’s the case, you’d better hope and pray that you’ve kept meticulous records and copies of every receipt, every mileage log, ever repair, replacement, professional fee, and expense you claimed. If your portfolio is big enough that you consider yourself a real estate professional for tax purposes, you’ll also want to be sure that you keep records and documentation that will support that you are actively managing the property. This would include things like appointment books, calendars, travel logs or other proof that this is more than just a hobby for you.
If you have any further questions reach out to your CPA or Contact US and one of our professional property managers will point you in the right direction.