paying any capital gains tax at all.
1. Purchase properties using your retirement account
Tax-deferred retirement accounts such as an IRA, Roth IRA, or 401(k) plan allow investors to buy rental properties with their retirement savings while also allowing rental income and capital gains to accumulate tax-free until an investor begins to make withdrawals. IRA contributions are also a tax return deduction, capital accumulates tax-free, and money can be withdrawn when the investor retires at a lower tax bracket.
2. Convert the property to a primary residence
Converting a rental property into a primary residence allows real estate investors to exclude up to $500,000 in taxable capital gains, or $250,000 for taxpayers who are single. Let’s use the $200,000 rental property we discussed earlier as an example. Assume that over the last ten years the property has consistently appreciated and now has a net sales price of $300,000. If an investor sells, the capital gain would be $100,000 and the potential capital gains tax due would be $15,000 (assuming the mid-range capital gains income bracket and ignoring depreciation recapture). By making the rental property the primary residence, Section 121 of the Internal Revenue Code allows an investor to reduce paying capital gains tax by: • Owning the home for at least two of the preceding five years before selling it • Using the home as the primary residence for at least two
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