Thorough Services Tailored for the Sale or Purchase of Real Estate and Other Large Assets in Phoenix

Potential Liabilities, Tax Options and Important Considerations

Capital Gains Tax

Selling a large asset that has appreciated in value while you’ve owned it will result in capital gains tax liability on the profit. As with all capital gains, whether from equities, real estate or any other investment, there are two potential rates:

• Short-term rate for assets held less than a year
• Long-term for assets held more than a year (typically taxed at a lower rate)

1031 Exchange

In the U.S., if you're selling an investment property, you can potentially defer capital gains taxes through a 1031 exchange, which involves reinvesting the proceeds from a sale into a similar type of property. This may be an ideal option if you’re doing something like selling a vacation home or rental property with the goal of buying new rental properties.

If you have a second home and you want to do a 1031 exchange, there is some prep work you’ll need to do which involves renting out the property at fair market value for a set period of time prior to the sale and not occupying the structure for personal use more than you’re renting it out.

This may be an attractive option for people nearing retirement age who want additional funds for generating supplemental income via rental properties. Our tax professionals can help explain the steps you’ll need to take if you want to pursue this tax-advantaged path.

Depreciation Recapture

If you've claimed depreciation on an investment property, you may have to pay depreciation recapture tax when you sell. This tax is on the amount of depreciation deductions you took. If you're buying property as an investment and renting it out, you can usually deduct the cost of the property over time through depreciation.

Home Sale Tax Exclusion

If you're selling your primary residence in the U.S., you may be able to exclude a portion of the gains from your income ($250,000 for single filers, $500,000 for joint filers) if you've lived in and owned the home for at least two of the last five years.

Property Transfer Taxes

Some states or municipalities impose taxes on the transfer of property. As a buyer or seller, you might be responsible for these.

Mortgage Interest Deduction and Property Tax Deduction

If you're buying a primary residence or second home and taking out a mortgage, you may be able to deduct the interest paid on the mortgage from your taxable income. Property taxes paid on a primary residence or second home can also be deducted, but the deduction for state and local taxes (including property taxes) may be capped ($5,000 for single filers and $10,000 for married or joint filers). 

Rental Income and Expenses

If you plan to rent out the property you’re purchasing, you'll have to report the income, but you can also deduct related expenses, such as maintenance, repairs, property management fees and more.