Morgan Stanley real estate analyst Laurel Durkay appeared on CNBC recently to deliver the financial behemoth’s latest housing outlook. It was great news for property owners and a call to action for potential buyers sitting on the fence, waiting for rates to fall.
Such is the shortage of inventory; in the next decade, 2 million homes will need to be built to satisfy demand. This means the rental market is set to soar.
It’s an opinion shared among real estate number crunchers at lenders and data-heavy websites. “While inventory this May is much improved compared with the previous three years, it is still down 34.2% compared with typical 2017 to 2019 levels,” said Realtor.com‘s Sabrina Speianu.
An article in Forbes echoed Speianu’s comments: “For the best possible outcome, we’d first need to see inventories of homes for sale turn considerably higher,” Keith Gumbinger, vice president at online mortgage company HSH.com, told the business website. “This additional inventory, in turn, would ease the upward pressure on home prices, leveling them off or perhaps helping them to settle back somewhat from peak or near-peak levels.”
Low Inventory Keep Renters Renting
Limited inventory—particularly away from Sunbelt markets—has caused rents to remain elevated and stopped inflation from falling as fast as economists would like. The resultant high interest rates have created a perfect storm of unaffordability. Developer AMH Homes says in its markets, the cost of buying a home is 25% more expensive than renting. This has continued to push potential buyers toward rental homes.
Rental data site Yardi Matrix reveals that the rents apartment tenants pay to renew their leases are still rising. Rents in the Northeast and Midwest were up considerably over last year. The highest gains were seen in New York City, with a 4.8% year-over-year increase, and Columbus, Ohio, with a 3.6% increase.
Single-Family Homes Are a Coveted Investment
According to Morgan Stanley, single-family homes are the most lucrative asset class, with national developers such as AMH Homes focusing specifically on them. The build-to-rent single-family development boom is one of the hottest real estate sectors.
In 2023, builders completed an estimated 97,000 build-to-rent residential homes, including those outside build-to-rent communities, which represented an increase of 45% from the year before and a record number. Moving into a built-to-rent home gives tenants the feeling of living in a single-family home community while they prepare financially to move into a home of their own. It’s an ideal stopgap amid high interest rates.
Elsewhere, high rates have caused developers of large multifamily rental projects, such as Seattle-based Tyler Carr, who was due to break ground on a 104-unit development in Boise, Idaho, to press pause. And in Worcester, Massachusetts, at the center of the state, about 2,000 units have been delayed in coming to market.
“We certainly are seeing a decline in construction,” said Robert Dietz, chief economist at the National Association of Home Builders, told the Wall Street Journal. “Deals and financing have dried up.”
Housing data company CoreLogic, quoted in Forbes, recently analyzed single-family rental increases and found that of the 20 metros analyzed, New York posted the highest year-over-year increase in single-family rents in February 2024: 6.9%. Seattle came in second at 6.8%, followed by Boston at 6.4%.
Taking a step back and looking at the data with a wider lens, the numbers are staggering. According to Realtor.com, the typical listed home price grew by an astounding 37.5% overall from May 2019 to May 2024. The demand has created a golden opportunity for smaller investors who either can’t get approved for multifamily units or are unwilling to undertake the responsibility to laser-focus on building their single-family portfolios.
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Essential Moves You Can Make to Build a Single-Family Rental Portfolio
So what can real estate investors do to make sure they are positioned to get into single-family rentals? Here are 12 moves to consider.
1. Increase your credit score
Let’s start with the basics. Without a high credit score, your chances of getting approved for a loan are severely diminished. There are many ways to start building your credit. The faster you start, the better.
2. Buy a rental first
While the desire to buy a home to live in yourself is understandably strong, it might not be the best move if you want to scale quickly. Keeping a low debt-to-income ratio will allow you to get approved faster and buy more homes in a shorter period of time.
3. House hack
Here’s another old-school technique: Assuming you already have a single-family home with additional space that can easily be rented, such as a finished basement, renting part of your home to help with your expenses, either to a full-time tenant or a short/mid-term guest, will help you save cash faster for your next property.
4. Live in your home and move every two years
If you are not in a rush to scale, this is a great way to avoid capital gains taxes while buying and selling your personal residence for profit. The tax code allows owner-occupants who have lived in a home for two out of every five years to forgo paying capital gains taxes on $250,000 of profit if single and $500,000 of profit if a couple. You can use the money made as a down payment for an investment property.
5. BRRRR
No article on scaling would be complete without mentioning the BRRRR method. In an era of high interest rates, be careful that your investment still cash flows once you have taken equity out of it, or at least breaks even. Also, be sure to estimate the rehab costs correctly so you have enough cash to complete them and get your property rented quickly.
6. Liquidate assets
Whether you are an empty nester looking to downsize your personal residence or have stocks or a 401(k), you can liquidate assets that are not appreciating as quickly as the real estate market is one of the fastest ways to free up cash for investment.
7. Borrow money from friends and family
If you want to start your single-family real estate investing career, borrowing money from friends isn’t a bad idea—provided they say yes! Borrowing from people you know serves the same purpose as a hard money lender (without the high interest rates), and once you refinance the property, you can pay them back and use the equity to continue to BRRRR.
8. Take out a HELOC
If your single-family investment will appreciate at a greater interest rate than you will pay on your HELOC, consider using some of the interest in your residence to start your investing career.
9. Move into your rental and rent out your personal residence
Since it is currently 25% cheaper to rent than buy in some markets, moving into a rental while renting out your personal residence will not only leave you ahead financially but lower your debt-to-income ratio. If you can manage to amass a down payment for your second home in savings, helped by your lower living costs, you’ll be on your way to building a portfolio.
10. Earn more money and minimize expenses
We might be in an era of quiet quitting, but there’s a lot to be said for earning the most money you can from your job, being strategic about getting promoted or building your career, and keeping your living expenses low to save and invest in real estate. If you cannot earn more money in your day job, consider a side hustle.
11. Move somewhere cheaper
Moving somewhere cheaper doesn’t necessarily mean moving into a bad neighborhood. It could mean bunking with mom and dad (if you are young enough, and they are willing), moving into a co-living space, or even moving overseas. The idea is to decrease your living expenses so you can save for your first investment.
12. Find a seller-financed deal
These are often easier said than done to find. However, there are always investors who are cycling out of being full-time landlords and don’t want the tax hit that comes with receiving a lump sum of cash, but prefer regular payments while enjoying their retirement. The advantage for a buyer is that the loan won’t show up on your credit reports, and qualifying might be easier than with a traditional lender and less expensive.
Final Thoughts
As ATTOM Data’s recent Top 10 Counties for Buying Single Family Rentals in 2024 report shows, single-family rentals are booming nationwide. Between 2023 and 2024, median three-bedroom rents increased more than median single-family home prices in 216, or 63%, of the markets analyzed.
Buying a single-family home can be the springboard for other purchases and is one of the easiest loans to qualify for, thanks to FHA lending guidelines. A 203(k) loan can also help you fix up your home, giving you a live-in BRRRR, which you can then refinance and repeat.
Not every deal will cash flow in this current market of high interest rates and minimal inventory. As long as you are not losing money, appreciation is the real play. Once rates drop, you can refinance and enjoy cash flow.
Provided by Bigger Pockets
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By G. Brian Davis
The Big Picture On How To Avoid Capital Gains Tax on Real Estate:
- The IRS taxes your profits on real estate and other investments as capital gains.
- The tax rate on capital gains is lower than regular income — if you owned the investment for at least a year.
- Real estate investors have many options to reduce, defer, or avoid capital gains taxes. Each method have their pros and cons, so make sure that your chosen one fits with your overall real estate investment strategy.
- The IRS taxes your profits on real estate and other investments as capital gains.
- The tax rate on capital gains is lower than regular income — if you owned the investment for at least a year.
- Real estate investors have many options to reduce, defer, or avoid capital gains taxes. Each method have their pros and cons, so make sure that your chosen one fits with your overall real estate investment strategy.
When you sell a property for a profit, you owe capital gains taxes on it. Maybe. Sometimes. If you don’t know how to avoid real estate capital taxes.
Because real estate investments come with a slew of tax advantages. While you own the property as a rental, you can take nearly two dozen landlord tax deductions. And when it comes time to sell, you can reduce or avoid capital gains taxes on real estate through another half dozen options.
Start thinking about your real estate exit strategies now, long before you’re actually ready to sell. By positioning yourself early, you can dodge the bullet of capital gains taxes on investment properties altogether.
What Are Capital Gains Taxes on Real Estate?
The IRS requires you to pay taxes on your profits when you buy low and sell high. Capital gains taxes apply whether you earn a profit buying and selling stocks, collectibles, or anything else of value — including real estate.
Uncle Sam calculates your capital gain by subtracting your cost basis (the amount you paid) from the sale price, minus any expenses such as Realtor fees. As with all income and profits, you must report these gains to the IRS.
You can sometimes increase your cost basis to lower your capital gains. For example, you can add some purchase closing costs to your cost basis. Likewise, you can add the cost of property improvements to lift your cost basis and reduce your taxable gain.
Not all capital gains are treated equally. Capital gain taxes depend on how long you owned the asset, whether you lived in the property as your primary residence, and any adjustments you can make to your cost basis. Homeowners get a special exemption from capital gains taxes, up to $250,000 per spouse (more on that shortly).
Lower capital gains taxes apply to assets you owned for at least a year, referred to as long-term capital gains.
How Much Is Capital Gains Tax in Real Estate?
If you own an asset for less than a year, you’ll owe short-term capital gains tax on it. The IRS taxes these short-term profits at the regular income tax bracket rates. For example, if you pay taxes at the 24% tax bracket, you’ll owe Uncle Sam 24% of your short-term capital gains from that year.
If you hold an asset longer than a year, the IRS taxes your gains at a lower tax rate. Expect to pay 0-20% (exact tax tables below).
Another crucial difference between how capital gains are taxed versus ordinary income: you don’t pay different tax rates for different income segments. If your total taxable income is above the threshold for paying 15% capital gains tax, all of your capital gains are taxed at 15%.
For example, say you earned $150,000 last year, of which $50,000 were long-term capital gains. You pay 15% of the total capital gains, rather than paying 0% on one portion and 15% on another (the way that ordinary income tax brackets work. You’d pay a total capital gains tax bill of $7,500 for the year.
Short-Term vs. Long-Term Capital Gains
Before diving into individual strategies to avoid real estate capital gains taxes, you first need a baseline understanding of short-term versus long-term capital gains.
If you own an asset — any asset — for less than a year and then sell it for a profit, the IRS classifies that profit as a short-term capital gain, taxed at your regular income tax rates. For example, say you flip a house and earn a $50,000 profit on top of your $85,000 salary. As a single person, you would pay taxes on that extra $50,000 in income at the 24% federal tax rate.
Regular income tax rates, and therefore short-term capital gains tax rates, read as follows in 2024:
| Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 10% | 0 – $11,600 | 0 – $23,200 | 0 – $16,550 |
| 12% | $11,600 – $47,150 | $23,200 – $94,300 | $16,550 – $63,100 |
| 22% | $47,150 – $100,525 | $94,300 – $201,050 | $63,100 – $100,500 |
| 24% | $100,525 – $191,950 | $201,050 – $383,900 | $100,500 – $191,950 |
| 32% | $191,950 – $243,725 | $383,900 – $487,450 | $191,950 – $243,700 |
| 35% | $243,725 – $609,350 | $487,450 – $731,200 | $243,700 – $609,350 |
| 37% | $609,350 and up | $731,200 and up | $609,350 and up |
But when you own an asset for more than a year and sell it for a profit, the IRS classifies that income as a long-term capital gain. Instead of taxing it at your regular income tax rate, they tax it at the lower long-term capital gains tax rate (15% for most Americans).
Here are the long-term capital gains tax brackets for tax year 2023:
| Capital Gains Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0 – $44,625 | $0 – $89,250 | $0 – $59,750 |
| 15% | $44,626 – $492,300 | $89,251 – $553,850 | $59,751 – $523,050 |
| 20% | $492,301 and up | $553,851 and up | $523,051 and up |
| Additional Net Investment Income Tax (NIIT) | |||
| 3.8% | MAGI above $200,000 | MAGI above $250,000 | MAGI above $200,000 |
And the long-term capital gains brackets for 2024:
| Capital Gains Tax Rate | Single | Married Filing Jointly | Head of Household |
|---|---|---|---|
| 0% | $0 to $47,025 | $0 to $94,050 | $0 to $63,000 |
| 15% | $47,026 to $518,900 | $94,051 to $583,750 | $59,751 – $523,050 |
| 20% | $518,901 and up | $583,751 and up | $551,351 and up |
| Additional Net Investment Income Tax (NIIT) | |||
| 3.8% | MAGI above $200,000 | MAGI above $250,000 | MAGI above $200,000 |
The easiest way to lower your capital gains taxes is simply to own the asset, whether real estate or stocks, for at least a year.
Capital Gains Tax on Home Sales vs. Rental Properties
The short version: homeowners get an exemption on capital gains tax (under some circumstances). Landlords don’t.
Single homeowners can avoid capital gains tax on the first $250,000 of profits; married homeowners can dodge capital gains tax on up to $500,000. They must have lived in the property for at least two of the last five years however. That means second homes or vacation homes don’t qualify (more on the Section 121 exclusion below). House hackers who live in a property with up to four units, or a single-family property with an accessory dwelling unit, do qualify for the exclusion.
Real estate investors don’t get this homeowner exclusion for capital gains tax. So how can they avoid capital taxes on real estate?
When Do You Pay Capital Gains Tax on a Home Sale?
You typically pay capital gains taxes on sold properties along with the rest of your tax return on April 15.
However the IRS may hit you with a penalty if you owe a large capital gains tax bill and fail to make estimated tax payments throughout the same tax year. Specifically, the IRS says “Generally, you must make estimated tax payments for the current tax year if both of the following apply:
-
- You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits, and
- You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your current year’s tax return, or
- 100% of the tax shown on your prior year’s tax return. (Your prior year’s tax return must cover all 12 months.)”
Speak to your tax advisor about estimated tax payments if you expect a large profit on the sale of a property.
How to Avoid Capital Gains Tax on Real Estate
No one wants to pay more taxes than they have to. But as a real estate investor, you have far more options than the average American to lower your taxes, at least on the profits from your investment properties.
Beyond owning the property for at least a year, try the following tax tactics to reduce or eliminate your real estate capital gains taxes entirely.
1. Avoid Capital Gains Tax on Your Primary Residence
When you sell a property that you’ve lived in for at least two of the last five years, you qualify for the homeowner exemption (also known as the Section 121 exclusion) for real estate capital gains taxes.
Single homeowners pay no capital gains taxes on the first $250,000 in profits from the sale of their home. Married homeowners filing jointly pay no taxes on their first $500,000 in profits.
You don’t have to live in the property for the last two years, either. Any two of the last five years qualifies you for the homeowner exclusion.
Consider doing a live-in flip, where you live in the property for two years as you renovate it, then sell it for a profit. It makes for a fun way to house hack, if you’re handy and enjoy fixing up old homes.
Alternatively, you could house hack a multifamily property, then either sell it after two years or keep it as a rental. Either way, you get to live for free and pay no real estate capital gains taxes! Toy around with our house hacking calculator to plug in any property’s cash flow numbers.
You can use the homeowner exemption repeatedly, moving as frequently as every two years and avoiding capital gains taxes. But you can’t use it twice within a two-year period.
2. Check If You Qualify for Other Homeowner Exceptions
Had to move in under two years? You may still qualify for a partial exemption from capital gains taxes on your primary residence.
The IRS offers several exceptions for homeowners who were forced to move, whether for a change of job, health issue, or other unforeseeable events. If you lived in the property for less than two years and were forced to move, speak with your accountant about any partial capital gains exemptions you might qualify for.
3. Raise Your Cost Basis by Documenting Expenses
Here’s a quick terminology lesson for non-accountants: your cost basis is what you paid for a property or other asset, including renovation costs.
Say you buy a property for $100,000, put $40,000 of repairs into it, then sell it for $200,000. You’d calculate your profit by subtracting your $140,000 cost basis from your $200,000 sales price, for a taxable profit of $60,000.
(In the real world you’d have all kinds of other deductible expenses, such as the real estate agent’s commission, but they distract from the point at hand so we’re ignoring them.)
It’s easy enough to keep your receipts, invoices, and contracts when you’re flipping a house over the course of a few months. But what about when you own a rental property for 30 years? All those receipts, invoices, and contracts tend to get lost over the years, but they can help lower your capital gains tax bill when it comes time to sell.
The cost of every “capital improvement” you make to the property can add to your cost basis, reducing your taxable gains. Returning to the example above, you buy a rental property for $100,000, and over the next 30 years you pay $500 here and $1,500 there in capital improvements such as new windows, roof repairs, kitchen updates, landscaping, new driveways, and so forth. It adds up to $40,000 in total capital improvements, but it’s spread out over 30 years.
When you sell the property for $200,000, you can raise your cost basis by that $40,000 and pay capital gains on $60,000 rather than $100,000 — but only if you kept all those receipts and invoices. Save digital copies of all cost documents in a folder specifically for that property that you can pull up when it comes time to sell. It can save you tens of thousands of dollars in taxes!
4. Do a 1031 Exchange
The IRS lets you swap or exchange one investment property for another without paying capital gains on the one you sell. Known as a 1031 exchange, it allows you to keep buying ever-larger rental properties without paying any capital gains taxes along the way.
Here’s how the process goes:
| Step | Action | Timeline | Key Points |
| 1. Consult Advisor | Consult tax advisor and Qualified Intermediary (QI). | Before starting | Understand 1031 rules and select a QI. |
| 2. Sell Property | Sell the current investment property. | Varies | Proceeds must go to the QI. |
| 3. Identify Property | Identify replacement properties. | Within 45 days | Up to three properties or any number if their combined value is within 200% of the sold property. |
| 4. Declare Intent | Declare intent for 1031 exchange in writing. | During property sale | Proper documentation is essential. |
| 5. Exchange Agreement | Sign exchange agreement with the QI. | Before closing replacement | Specify property exchange and fund transfer terms. |
| 6. Close Purchase | Purchase replacement property via QI. | Within 180 days | Title transfer must match the entity that sold the initial property. |
| 7. Report to IRS | Report exchange using IRS Form 8824. | By tax filing deadline | Detailed reporting required. |
| 8. Maintain Records | Keep transaction records and monitor requirements. | Ongoing | Ensure compliance and plan future exchanges if needed. |
The Breakdown
It works like this.
You scrimp and save the minimum down payment for a rental property, buying a property for $100,000 and setting aside the cash flow for a few years. The property builds equity, appreciating in value to $120,000 even as you pay down the mortgage, and after a few years you’ve set aside more cash to boot.
You sell the property, and instead of paying capital gains taxes on the profits, you put them toward a down payment on a $200,000 multifamily rental.
A few years later you buy a $350,000 multifamily property, and a few years after that a $600,000 property, each of which produces more real estate cash flow than the last.
Eventually, you reach financial independence, with enough cash flow to live on — and you never had to pay a cent in real estate capital gains taxes.
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5. Sell in a Year When You’ve Taken Other Losses
Capital losses cancel out capital gains. So if you get hit with losses one year, that year makes a great time to sell your property so your losses offset your gains.
Imagine the stock market dips 10% and you sell off some stocks, hoping to avoid further losses from market correction or bear market. You take $20,000 in losses from selling those stocks.
Meanwhile you own a rental property that you’ve been meaning to sell. You decide to sell it now, knowing you can offset your capital gains on it with the losses you took on your stocks. You sell the property for a profit of $30,000, and you pay capital gains taxes on $10,000 after subtracting the $20,000 in losses from stocks.
Perhaps you even luck out with the timing, putting that $30,000 back into the stock market at its low point and riding the recovery upward.
6. Ladder Real Estate Syndications
When you invest in real estate syndications, you tend to show paper losses for the first few years. You can use those paper losses to offset other passive income and gains.
Why do syndications typically report losses on paper for the first few years, even as they pay you hefty distributions and cash flow? Because syndicators often perform a “cost segregation study” when they buy the property, to recategorize as much of the building as possible to other tax categories with shorter depreciation periods.
Of course, once the property sells and you get your big payday, you’ll owe both capital gains taxes and depreciation recapture. Which is precisely why it helps to keep investing in new real estate syndications every year, so you continue offsetting gains with paper losses from depreciation.
Hence the term “ladder” — the new syndication you buy this year helps offset taxable gains from the syndication you bought four years ago.
7. Harvest Losses
Sometimes, investors strategically sell for a loss, and use that loss to offset their capital gains. It’s called harvesting losses, and it makes sense when you have assets you don’t like or that underperform for you.
Say you bought a portfolio of five rental properties. You find yourself short on cash and want to raise a little capital by selling one, but don’t want to pay capital gains taxes on it.
One of the properties turned out to be a lemon, and has caused you nothing but headaches and negative cash flow. To offset the gains of selling a property with some equity, you decide to harvest some losses by getting rid of the lemon at the same time. It’s just costing you money anyway, so now makes a great time to sell it.
You sell both properties, and the loss from the lemon washes out the gains from a “good” property. You ditch the underperformer that was costing you money each month, and you avoid property gains taxes on the property you sold for a profit.
A more common example involves stocks. Say you buy a stock that consistently underperforms, and you have no reason to believe it will leap up in value in the future. Rather than letting your investing capital languish in the no-man’s-land of bad returns, you cut your losses by selling it, and put the money toward investments that will generate higher returns.
8. Convert Your Home into a Rental Property
If the homeowner exemption leaves you still owing capital gains taxes, you could always just keep the property as a long-term rental. As long as the property cash flows well, there’s no reason to ever sell it!
Let it generate passive income for you, month after month, year after year. As a buy-and-hold property, you can keep depreciating it for accounting purposes even as it appreciates in value.
Before converting your home into a rental property, run the numbers through a rental cash flow calculator. You may find your money could perform better for you by buying a property specifically as a rental, or even in the stock market, rather than sitting tied up in your ex-home.
That goes doubly when you can avoid capital gains taxes on the first $250,000 or $500,000 in profits.
9. Convert Your Home into a Short-Term Rental
No one says you have to rent the property out to long-term tenants.
Run the numbers to calculate how it would perform as a vacation rental on Airbnb instead. You might just find it cash flows better.
Just watch out for local regulations designed to restrict short-term rentals — some cities effectively ban Airbnb rentals.
10. Move to a State with Lower Taxes
Uncle Sam isn’t the only one after your tax dollars. Most state governments actually take a harder stance than the IRS on capital gains from real estate, charging income taxes at the normal tax rate.
Nine states charge a lower long-term capital gains tax rate however, similar to the federal government: Arizona, Arkansas, Hawaii, Montana, New Mexico, North Dakota, South Carolina, Vermont, and Wisconsin.
Another seven states charge no income taxes at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Finally, New Hampshire and Tennessee don’t charge regular income taxes, but do tax investment income.
Consider moving to a state with a lower tax burden to keep more of your money where it belongs: in your own pocket.
11. Pull Out Your Equity by Borrowing, Not Selling
You don’t have to sell your investment property in order to cash out its equity. Why not pull out the equity and keep the property to boot?
When you own a rental property free and clear, it does cash flow better. But you can still take out a rental property loan or a HELOC against your investment properties to access the equity, all while the property continues to appreciate in value and generate income for you each month.
Your tenants pay off your loan for you, and all the while you keep benefiting from cash flow, appreciation, and investment property tax advantages.
12. Pass the Property to Your Heirs as Part of Your Estate
No one says you have to sell your property. Ever.
Why not keep it until the day you die, and pass the golden goose on to your heirs? It can keep generating passive income for them too.
And they probably won’t pay any inheritance taxes on your rental property either. Your heirs get a free pass on the first $13.61 million you leave them in tax year 2024, so unless you die with 30 properties, they probably won’t get hit with gnarly inheritance taxes.
Best of all, the cost basis resets upon your death. Again, cost basis is what you paid for the property plus any capital improvement costs, and it’s the “basis” on which any profits are taxed. When you die, it resets to the property value at the time of your death.
For instance, say you buy a property for $100,000, and over the next 30 years you put another $60,000 in capital improvements into it. Then you die and leave the property to your favorite child (we both know you have one).
At the time of your death, the property is worth $500,000. If your child were to sell the property, their cost basis for tax purposes would be $500,000 rather than the $160,000 in purchase price and improvement costs that you actually paid.
You avoid real estate capital gains tax entirely, your child avoids inheritance taxes, their cost basis resets so they wouldn’t owe capital gains taxes on all the equity you built, and they get an income-producing property. Win-win-win-win.
13. Buy or Transfer the Property to a Self-Directed Roth IRA
With a self-directed IRA, you get to invest in any assets you like, within a few constraints from the IRS. That makes self-directed IRAs a darling of real estate investors across the county.
And with a Roth IRA, of course, your assets grow tax-free so you don’t pay taxes on profits and returns.
Still, proceed with caution when it comes to self-directed IRAs. They come with setup and administration expenses, and add another layer of complications. Self-directed IRAs add particular challenges when you use real estate leverage to finance with a rental property loan.
Do your homework thoroughly, speak with your financial advisor, and consider leaving your IRA investments to stocks — real estate comes with plenty of its own cooked in tax advantages, after all.
14. Donate the Property to Charity
You could leave your property to your children. Or you could tell the spoiled brats to go earn their own fortune, and give your property to charity instead.
Not only do you not have to pay real estate capital gains taxes, but you also get a juicy tax deduction. For your entire equity in it, based on the current market value of your property.
As a nonprofit organization, the charity doesn’t pay any capital taxes on the property either. Again, both you and the recipient win, and the only party losing out is the IRS.
How to Calculate Capital Gains Tax on Real Estate
Long-term capital gains don’t add on to your regular income or push you into a higher income tax bracket. Instead, the IRS calculates them on a totally separate schedule.
If you earn $50,000 in regular income in 2023 and another $20,000 in long-term capital gains, the IRS taxes you like this:
For your regular income taxes, you’d pay 10% on the first $11,600 you earned, 12% on the next $33,550, and 22% on the remaining $4,850.
Because you earned more than $47,025 in total income, you’d owe long-term capital gains tax at the 15% rate.
FAQs on Capital Taxes on Real Estate
Still have questions? Here are a few common ones.
Can home sales be tax-free?
Yes, if you lived in the property as your primary residence for at least two of the last five years, you qualify for the homeowner exclusion (Section 121 exclusion). Single taxpayers are exempt from paying capital gains tax on the first $250,000 in gains, and married filers get the first $500,000 tax-free.
Do you pay capital gains taxes when you sell a second home?
Yes. Unless you utilize one of the tax strategies above, that is.
Do you pay capital gains tax if you lose money on a home sale?
No — capital gains tax applies to gains (profits). If you lose money on a bad investment, the loss can offset other investment gains. You may be able to offset up to $3,000 in active income as well (speak to an accountant!), and you can carry losses forward to future years as well.
Do house flippers pay capital gains tax?
Yes, and usually at the short-term capital gains rate, assuming they own the property for less than a year. If the renovation goes long, and they own the property for over one year, they owe capital gains taxes at the long-term tax rate.
When do I pay the capital gains tax on real estate?
You pay capital gains taxes on properties as part of your annual income tax return due on April 15.
Can you avoid capital gains by buying another home?
If you do a 1031 exchange, also known as a like-kind exchange, to buy a new investment property after selling an old investment property, then you can defer capital gains taxes. When and if you ever sell the replacement property, you’ll owe capital gains taxes at that time, unless you do another like-kind exchange.
You don’t need to buy another property to qualify for the homeowner exclusion on your primary residence.
Do I have to pay capital gains tax if I sell a second home or rental property?
Yes, unless you do a 1031 exchange, which defers it until you sell the new replacement property.
Final Thoughts On Capital Gains Tax
When you own an investment property for decades, as so many buy-and-hold investors do, you can rack up some serious equity. Equity that the IRS would love to tax you on, when you go to sell.
As a quick note on depreciation, beware that you owe the IRS depreciation recapture regardless of whether you actually deduct for property depreciation while owning it. So make sure you take depreciation on your investment properties in every tax return!
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Source: Landlord Gurus
Landlords strive to ensure their rental properties remain sought after in the competitive rental property market, where demand and supply constantly fluctuate. We have found one of the keys to our success lies in the art of effective marketing. This process goes beyond traditional avenues and embraces innovative strategies that most larger property managers do not take the time to do properly. As independent landlords, we are able to tailor a unique approach to marketing that works well for us.
In an era where every click matters, understanding how to find tenants fast is not just a skill, it’s a necessity for landlords seeking to maximize occupancy rates and rental income. In this article, we share actionable tips on how to list a rental property and market it effectively.
1. Captivating Visuals and Descriptive Listings
High-quality photos and engaging narratives play a pivotal role in capturing the attention of potential tenants. Investing in professional photography is not just an expense. In fact, it’s an invaluable asset that showcases property features in their best light, creating an immediate connection.
Equally crucial is the art of creating detailed and enticing property descriptions to evoke emotions and resonate with potential tenants. A well-presented visual and verbal narrative serves as the gateway to a property, tempting individuals to envision their lives within its walls. This strategic investment in presentation enhances the property’s appeal and significantly contributes to the speed at which prospective tenants are drawn to make inquiries.
2. Understanding Target Audience Preferences
To make sure your property catches the eye of the right people, it’s important to understand what they like. Start by doing some research on who might be interested in your place – like finding out their age, interests, and lifestyle. This helps you adapt your marketing to fit their preferences. Think about what makes your rental special and how it matches what they’re looking for.
Maybe your potential tenants love cozy spaces, so highlight that comfy corner. Or, if they’re into modern living, show off your sleek amenities. By knowing who you’re trying to reach, you can shine a spotlight on the things that matter most to them. This way, your place becomes a perfect match for their lifestyle, making it more likely they’ll be interested in moving in. It’s like speaking their language and showing them your place is exactly what they’ve been looking for.
3. Leveraging Online Rental Platforms
Enhancing visibility on reputable platforms such as Zillow is important. Effectively listing a rental on Zillow involves meticulous optimization of property listings with comprehensive descriptions, high-resolution imagery, and precise information. Consider improving the experience for potential tenants by incorporating virtual tours and 3D modeling, providing an immersive preview of the property from the comfort of their screens.
Mastering the art of how to list a rental property involves implementing strategies to increase visibility and attract tenants. By presenting your property with attention to detail and utilizing cutting-edge virtual tools, your listing becomes a standout in the competitive online landscape. This professional approach ensures that your property captures attention and communicates your commitment to excellence as a landlord.
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4. Engaging Online Presence and Community Building
Building a strong online presence is like opening the door to a vibrant community of potential tenants. Be active on social media platforms, sharing details about your property, local amenities, and community events. This creates a sense of connection and belonging. Encourage tenant reviews and respond promptly to feedback to maintain a positive online reputation.
Social media isn’t just about sharing — it’s a powerful tool to find tenants fast. By reaching out to a broader audience through online communities, you increase your chances of catching the eye of prospective tenants. In this digital age, fostering a virtual community around your property is not just about finding tenants; it’s about creating a welcoming space that resonates with individuals seeking more than just a place to live.
5. Maintaining Property Presentation and Ambiance
Ensuring your property is always looking its best is key to attracting potential tenants. Regular maintenance and upkeep create a welcoming environment that leaves a positive impression. Addressing maintenance issues promptly not only enhances the property’s appeal but also minimizes the time it stays vacant.
To go the extra mile, consider adding personal touches and enhancements to create a homely ambiance. Small details like well-maintained landscaping or a fresh coat of paint can make a big difference. These personal touches resonate with potential tenants, making them envision the property not just as a place to stay but as a true home.
6. Strategic Rental Pricing
Setting the right rental price is a strategic move that can make a big difference. Start by diving into market research to understand what similar properties in your area are charging. This helps you set a competitive rate based on local trends. Take a close look at what makes your property special – unique features justify your rental prices.
Finding the sweet spot between being competitive and making a profit is crucial. You want to attract quality tenants while maximizing your rental income. It’s a delicate balance, and staying informed about the market ensures you make informed decisions. By setting the right rental price, you draw in potential tenants faster and also set the stage for a successful and financially sound leasing experience.
7. Diversifying Marketing Channels
Broadening your reach involves exploring various marketing avenues. Consider traditional methods like local newspapers, magazines, and community events to tap into a diverse audience. Satisfied tenants can become your biggest advocates, generating valuable word-of-mouth referrals that enhance both reach and credibility.
Integrating digital and traditional marketing strategies creates a comprehensive approach. While online platforms maximize visibility in the digital world, traditional methods lend authenticity and local presence. This hybrid strategy ensures your property is showcased effectively across different channels, catering to a broader spectrum of potential tenants. By diversifying your marketing channels, you stay ahead of the curve and also establish a well-rounded presence in the competitive rental market.
Landlord Gurus Takeaway
Understand your target audience’s preferences, adapting property features accordingly. Utilize popular online platforms like Zillow, supplementing with virtual tours for an immersive experience.
Create an engaging online presence, building a sense of community through social media. Also, maintain property presentation with regular upkeep and personal touches, creating a homely ambiance. Set strategic rental prices based on market research, balancing competitiveness and profitability.
You should also diversify marketing channels by exploring both traditional and digital avenues. Incorporate word-of-mouth referrals for added credibility. This comprehensive strategy ensures landlords maximize property visibility, attract quality tenants, and ultimately improve the profitability of their rental investments.
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