Imagine this investing situation. You purchase a property in your own name and do a great rehab on it. It’s the best deal you’ve ever done, and you turn a massive profit in the space of about a year. You’re ecstatic, and then your accountant calls. He tells you that you are going to owe THOUSANDS of dollars to the federal government because of this fantastic deal, and, while you still made a profit, suddenly your stellar numbers aren’t what you expected them to be. You’re deflated, your business plan is knocked off course by the unexpected expense, and you angrily start reconsidering real estate.
Sounds pretty terrible, doesn’t it?
Well, good news! It doesn’t have to work out that way. And today’s guest, a patent-holding chemist turned VASTLY EXPERIENCED real estate investor and financial planner, has laid out four easy ways to avoid what many of you may have already guessed is the dreaded CAPITAL GAINS TAX.
First, a bit about Steve. He started life as a “nerdy scientist” as he likes to put it, then eventually (after earning FOUR that’s right, FOUR patents) got an MBA in finance, passed the national certified financial planner boards and, in the interim, started investing in real estate by purchasing his first duplex in 1979 in Kent, Ohio. Fast forward to the early 2000s and Steve had held about 80 rental properties during his investing career alone, but he cashed out just before the housing crash (yet another reason we like listening to this guy!) and now holds 9 condo properties, and three beach properties.
So as you can see, Steve’s got oh, a little bit of real estate and finance experience to back up his recommendations!
Steve told REI Today that there are actually FOUR ways to avoid paying capital gains taxes on real estate investments, and I’m thinking the last one in particular may really surprise you…
First, there is always what Steve calls the “hold ‘til you fold,” option, which means holding onto your real estate investment until you pass. Your heirs will avoid the cap gains tax and the depreciation recapture. In more of a hurry LOL? The next two options could help you…
Steve told me that a lot of savvy investors actually take advantage of a specific item in the capital gains code that allows people who are in the two lowest tax brackets (10 and 15 percent) to avoid paying capital gains entirely. If you have enough control over your personal income to maintain a position in that 15-percent tax bracket for the year of the sale, Steve said, then you could actually avoid paying that tax entirely. And if you can’t do that, consider “gifting” the property to a trusted someone, such as a family member, who is in that tax bracket. Will you have to pay for the service? Possibly (and hey, it’d be nice of you) but it could save you a bundle on your tax bill.
Finally, Steve said, there is actually a way to avoid paying capital gains taxes using something called a tax deferred exchange, also known as a 1031 exchange. While this doesn’t technically eliminate your capital gains taxes, it can be used to defer them indefinitely as long as you continue to reinvest the money you make into other what the IRS calls “productive uses in a trade or business for investment” and so long as the profits are used for a similar purpose to the manner in which they were obtained in the first place. Essentially, if an investor makes $200,000 on a deal and ends up owing $70,000 of that (yes, that is actually possible) in taxes, a 1031 exchange could enable him or her to reinvest the entire $200,000 instead of paying the $70K up front.
Now, that sounds really exciting (think what you could do with that kind of money STAYING in your real estate business instead of heading off into the black hole that is our federal government? But it’s also a bit confusing. So if you want more information, I’ve got great news. Steve is actually about to host a GaREIA-exclusive course offering wherein he will spend the next 60 days teaching participants in this coaching program his own personal path to MASTERING PASSIVE INCOME as well as revealing “The KEY to Quitting Your Day Job!” This class is not a regularly-offered course, so we can’t say for sure if (or when) Steve will be back for the next one, so RIGHT NOW head on over to www.rei.today/STEVE and get all the information on the massive amount of training that Steve is getting ready to provide. That’s www.rei.today/STEVE. And if you aren’t in the Atlanta area, don’t worry! We’ve got something for you, too. Locked up safe in the REI Today Vault, I’ve got what I’ve named Steve’s Key Codes for Financial Success. They’re two additional three- and four-step modules for effectively “Thinking Strategically About Real Estate” and “Picking a Financial Advisor.” If you liked the way Steve broke capital gains down into action items, you’ll love these other key codes as well, so head over to www.rei.today/vault to get’em, or, if you’re not yet a member, text REITODAY no spaces, no periods, to 33444 and I’ll provide you with fast, immediate access to all sorts of great trainings, news coverage, interviews, and lot more timely information that will help make your investing safer, faster, and more profitable.
And remember, when you do that, you’ll also be able to GROW YOUR NETWORK by interacting with me and your fellow listeners to REI Today… so stop by to ask questions, make comments and network with other investors across the country. Text REITODAY no spaces no periods to 33444 or head over to www.rei.today/vault right now.
REI Nation, thanks for listening in and always remember this:
Your best investment is your own education.
Carole Ellis is the host of Real Estate Investing Today, a popular 9-minute daily podcast focused on educating real estate investors about the important topics that will make their investing SAFER, FASTER, and MORE PROFITABLE. She's also the editor of the Bryan Ellis Investing Letter. She has more than a decade's worth of experience in and reporting on the real estate industry and, additionally, has written dozens of courses on the topic. Carole lives in Kennesaw with her husband, Bryan, and four children. She believes wholeheartedly that your best investment is always your OWN education.