11353 REED HARTMAN HIGHWAY
CINCINNATI , OH 45241
Robert W. Wood , FORBES CONTRIBUTOR
With a personal residence, investment real estate, or other investment property, consider taxes before you sign. Your gain will often be long term capital gain, meaning a federal tax rate of 15 to 20%, depending on your income. Depending on your income, you may have to add another 3.8% in federal taxes. That's the net investment income tax added by Obamacare. President Trump said he would repeal it, but so far that hasn't happened
That means up to 23.8% in federal tax, which is better than 39.6% on ordinary income. Add your state taxes too. But aren't there breaks to eliminate or defer the taxes? First, you need to distinguish between personal use property, such as your principal residence, and investment or business property. If you sell your principal residence and have a gain, it's taxable. However, if you have lived there as your primary residence for two years out of the last five, you can shield up to $500,000 of gain if you are married and file jointly. The exclusion is $250,000 if you file separately or are single.
Many people ask if there is a rollover rule allowing you to pour the gain from selling one residence into a new and bigger house. However, that "trading up" rule was repealed years ago. Still, the up to $500,000 exclusion can be used over and over, essentially every two years. You probably don't want to move that often, but if you do, Uncle Sam can help subsidize it.
If you sell business or investment property, you can't use the $500,000 exclusion. But you may be able to swap for other business or investment property tax-free. Section 1031 of the tax code allows you to exchange properties and roll over your gain into the property you receive in the swap. You can do it again and again. Despite a profit on each trade, you avoid tax until you cash out. Then, you'll hopefully only pay one tax, a capital gain..