Tax Benefits for Real Estate Investors

A long-term investment strategy will keep your taxes to a minimum.


Related To:

The early bird might get the worm, but the real estate investor who  waits  to sell gets the biggest advantages from the IRS. Here are some tax tips for investors that will help you get the most out of your real estate holdings.

Hold Properties for More Than a Year

Flipping properties in a matter of weeks might seem glamorous on TV, but a large portion of the profit will go straight to the IRS unless you hold a property for more than a year.

Any investment profit is considered capital  gains,  and is taxed based on your income and the amount of time you've owned the property.

Hold an asset for less than a year and you'll be charged the income tax rate, which can be up to 35 percent. If you keep a property for more than a year, you'll be subject to long-term capital gains taxes, which normally top out at 15 percent.

Establish an Investment Property as Your Primary Residence

You can avoid capital gains tax altogether if you turn your investment property into a primary residence. To do this, you must spend 2 years (or 730 days) living in the home in the last five years. The time doesn't have to be sequential. Once you've established residency, you're eligible to sell the home and can make up to $250,000 in capital gains ($500,000 if married filing jointly) without paying any taxes.

Be Prepared for Business Taxes

If you complete several real estate transactions per year, don't be surprised if the IRS considers them business or trade rather than an investment strategy. While the circumstances vary from case to case, if you're earning more than half of your income from real estate, your earnings will change from "capital gains" to a means of producing income that's subject to ordinary tax rates. Plus, there's an additional 15.3 percent in self-employment taxes.

Do a Like-Kind Exchange

If you want to get a new property while avoiding capital gains taxes, a like-kind exchange is a good option. Also known as a section 1031 exchange, the provision allows you to "exchange" one property for another of similar value and defer the tax bill.

To qualify, both the property you give up and the one you receive must be used for investment purposes, trade or business. Also, it must be "like-kind," or an exchange of two. While you can exchange a parcel of land in the city for a dairy farm in the country, you couldn't exchange that same city parcel for say, a flat-bed truck. The exchange of any real estate for another piece of real estate, regardless of either's quality, is like-kind.

You can also do a tax-free exchange of a rental property that has been used for personal purposes for a similar piece of property. To qualify, you must have owned the property for 24 months prior to the exchange, and must have rented the home for 14 days or more. Additionally, you cannot have used the property for more than 14 days or 10 percent of the time it was rented in the past two years, whichever is greater.

Remember, like-kind exchanges will only defer your tax bill. If and when you decide to sell the property you exchange for, you'll likely owe taxes.

Next Up

Did I Accept a Bad Offer on My Home?

Worried you accepted a bad offer for your home? Let real estate expert soothe your fears.

Short Sale Rules: What You Need to Know

A short sale occurs when a property is sold for less than what is owed on the mortgage with the lender's approval. Learn the advantages and disadvantages of this type of transaction for the seller and the buyer.

The Skinny on the Short Sale

How to get a short sale when you're facing foreclosure on a house.

What Foreclosure Means and How to Stop It From Happening

Learn about the various steps in the foreclosure process and ways you can avoid losing your home.

How to Deal With Your Lender When Facing Foreclosure

In the foreclosure world, "workout" has nothing to do with the elliptical trainer. It's about cutting a deal with your lender to stop the foreclosure process.

Advantages and Disadvantages of Buying a Home in Foreclosure

Purchasing a foreclosed home can mean getting a bargain, but there are potential pitfalls too.

How to Quickly Sell Your Home When Threatened With Foreclosure

Get tips and advice on how to sell your home fast.

Sellers: What to Do When You Can't Find a Home Before Yours Sells

If you sold your house before you've found new digs, don't worry: You have options.

For Sale By Owner (FSBO): How to Sell Your Home by Yourself

Are you considering selling your home without a real estate agent? Follow these tips to make the process as smooth as possible.

Pros + Cons of Rent-to-Own Agreements for Buyers and Sellers

For both the seller and homebuyer, renting to own a house can be a dream come true — or a nightmare. Find out if this type of real estate transaction is right for you.

Go Shopping

Get product recommendations from HGTV editors, plus can’t-miss sales and deals.


Follow Us Everywhere

Join the party! Don't miss HGTV in your favorite social media feeds.