Selling Your Rental Property? Don’t Forget the Capital Gains Tax

You may already be aware as a diversified investor that appreciated stock does have certain advantages over appreciated real estate when it comes to asset liquidity. Even after the rollercoaster stock market we experienced as a direct result of the COVID-19 pandemic; investors could enjoy the ease with which they could parse and sell portions of their shares over time to tap into their assets. You may be thinking about selling your rental property right now to tap into the inherent wealth of your rental holdings in a time when managing and owning rentals no longer seems quite as ideal.

Unfortunately, it’s much more challenging to approach the sale of your investment holdings from a “modular” perspective: you simply can’t sell off parts of your properties when you need to access their value. You have to sell the entire property. The downside of this—as you are probably already aware—is the punishing capital gains tax.

Short-Term Capital Gains Tax Rates

This type of tax is levied against gains on assets that have been in your possession for less than a year up to a year. Yes, if you picked a rental lemon that happens to be a great property and you intend to offload it, you’ll pay the price in the form of the short-term capital gains tax rate.

This is the same rate you would pay on your earned wages as a freelancer or employee. Of course, this rate varies based on your total taxable income—but that still left the rate in 2019 somewhere between 10% and almost 40%. You’re less likely to get hit with this rate as a long-haul investor, but it’s worth being aware of regardless.

Long-Term Capital Gains Tax Rates

If you’re a buy-and-hold investor, this is probably the tax rate you should be more concerned with when selling your rental property. This will affect you if you’ve had your holdings in your possession for longer than one year. In some cases, the rate can be as low as 0%—depending on your income—and will top out around 20%.

If you’re here reading this article right now as you consider offloading your investment properties, you’re likely looking for ways to defer capital gains tax. Unfortunately, if the goal is to liquefy your holdings and free yourself from the burdens of self-management, many of your options are not optimal if you’re seeking a genuine exit from the demands of your portfolio.

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Strategies That Won’t Meet Your Needs

When looking for ways to defer capital gains tax, one of the first strategies that weary investors bump into is the 1031 exchange. We have plenty of information in our other articles about why the 1031 exchange isn’t actually ideal for you as an investor. To see where we’re going with that line of reasoning, we recommend you check out the following articles:

Beyond the usual advice to dodge a 1031 exchange if you have no interest in swapping one workload for another, there are some “exotic” ways to defer capital gains tax that emerged as a result of the Trump tax overhaul that went into effect in the 2018 tax year.

Opportunity Zones

One of these options that has investors excited is the concept of “Opportunity Zone” investing. With this method, you can temporarily defer capital gains on appreciated assets up to 15%, and an overall capital gains assessment of 0% for holdings you’ve maintained for longer than ten years. While the goal is to uplift struggling communities with an injection of capital, this tax deferral strategy ultimately doesn’t serve you as an investor if you want to leave your portfolio—and your workload—behind.

Tax Timing

There are other, age-old strategies that involve some serious planning because they rely on carefully pairing your capital gains with your capital losses. Another name for this approach is “tax-loss harvesting,” but this strategy won’t meet your immediate needs to convert your assets and shelter them from the brunt of the capital gains tax. Under this plan, you must still report all of your capital gains—but you’re only allowed $3,000 of net capital loss to offset them.

In a similar vein to this, there’s the option of timing your sale with a reduction in income to reduce your capital gains tax rate. This is actually a reality for many right now as a direct result of COVID-19, when even positions that seemed secure saw furloughing, wage reduction, or outright job loss. From everyone on our team here at The Peak Group, we hope you do not have to endure this prospect as your current reality.

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Investing in real estate—especially residential real estate—has long been considered an investing bastion, and is a primary source of income for many investors. Even with the hardships caused by COVID-19, the vast majority of renters were still able to successfully make their rental payments in April and May. If you haven’t experienced a loss of income and you’re looking for ways to defer capital gains tax when selling your rental property, there is a way to:

Make your illiquid property assets liquid.
Continue enjoying the stability of rental income.
Defer the capital gains tax and reduce your workload.
Parse your assets in such a way as to access your capital easily.

How can investors access this kind of opportunity? Instead of selling your rental property, you can turn to a DFW UPREIT.

The Peak Group Is Your Guide

At The Peak Group, many of us are investors just like you. We’ve been where you’re standing now in the past—and it’s exactly why we want to tip investors off about the opportunities of a DFW UPREIT when you’re looking to offload your properties.

However, not just any UPREIT can offer the kind of benefits we mentioned above. With the impact of COVID-19 on the commercial market, you should definitely be looking into the safety of an UPREIT with a residential focus. People will always need safe, reliable housing—but with e-commerce completely crushing traditional retail and the rise of the work-from-home revolution, commercial is not where you want to be right now.

Let us guide you through the benefits of an UPREIT—and how to find the right one for your needs! Let us show you the benefits waiting for you with an UPREIT structure, and let’s get started crafting your exit strategy to true financial freedom.

Selling Your Rental Property? Don’t Forget the Capital Gains Tax | The Peak Group