Selling real estate can be a great way to make a profit, but it can also come with a hefty tax bill. Fortunately, there are ways to save on taxes when selling real estate, such as through an installment sale.
Installment Sales
An installment sale is where the buyer of real estate pays the seller in installments over time, rather than paying the full amount in one lump sum. This allows the seller to spread the taxable gain from the sale over several years as they receive payments, rather than having to pay taxes on the entire gain in one year at the current rate.
In addition to allowing the seller to spread out their taxes over time, an installment sale can also help them take advantage of the 0% capital gains bracket. Single filers making less than $47,025 and married filers making less than $94,050 in 2024 pay no taxes on their capital gains. This means that sellers can potentially save thousands of dollars in taxes by planning their installments around other income they receive in a given year to stay under the income threshold.
This strategy for selling on an installment sale can allow a landlord to earn predictable cash flow without the headaches of managing the property, while saving and/or deferring large amounts of capital gains taxes.
Homeowners Exclusion
When it comes to selling a primary residence, homeowners can also take advantage of the capital gains exclusion (IRC 121). This exclusion allows homeowners to exclude up to $500,000 of capital gains from their taxes if they are filing jointly, or up to $250,000 for single filers. This means that homeowners can potentially save thousands of dollars on taxes when selling their primary residence. To qualify for this exclusion, the homeowner must have owned and lived in the property as their primary residence for at least two of the five years preceding the sale. Additionally, they must not have used the exclusion in the past two years. Installment sales may be attractive to home owners who sell their home for a gain above these amounts, or for those who do not qualify for the exclusion.
Careful Planning
If you plan to use either an installment sale or the homeowners exclusion to save on capital gains tax, you should consult your tax advisor to carefully plan around capital gains tax rates or to make sure you qualify for the capital gain exclusion on the sale of your primary residence.
“Disclaimer: This is designed to provide general information regarding the subject matter covered. It is not intended to serve as legal, tax, or other financial advice related to individual situations. Consult with your own attorney, CPA, and/or other advisors regarding your specific situation.”
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