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What are the tax planning strategies for selling an investment property?

September 13, 2006

From:  Pascual
Date:  Mon, 26 Jun 2006

I have a property that was quit claimed to me by two of my older siblings some 20 years ago. At the time (in 1986), the property was assessed at around $60,000. At that point I had been living in the home for about 9 years, but I havenít lived in it for the last 12 years. Instead, Iíve rented the property since 1993. Iím at a point where Iíd like to sell the property but would not like to make a Section 1031 exchange. I realize that I will have to pay income taxes for a capital gain based on the assessed value at the time of the quit claim and the selling price.

  1. Since Iíve held the property for more than 20 years, will there be a tax break? (Iím in the 20% tax bracket.)
  2. How would I go about finding the exact tax rate for long-term capital gains for my situation?
  3. Are there any other tax planning strategies besides a 1031 exchange for my situation?


Date:  Fri, 07 Jul 2006

Hello Pascual,

Your tax basis is not determined using the assessed value of the property when quit-claimed to you. It is the original investment of your siblings less accumulated depreciation during the rental period.

  1. There is no special tax break for long-term holding except for long-term capital gains from holding the property more than one year.
  2. The maximum federal capital gains rate for an individual in your bracket is 15%. Gain attributable to the accumulated depreciation for the real estate is taxed at 25%. Other rates may apply for your state (California). Consider having a tax consultant make a tax projection for your facts.
  3. If you have other investments for which you would incur a capital loss, consider selling them in the same year that you sell the real estate. Also consider making an installment sale, where you carry the mortgage for the property. The gain is reported as principal payments are received, and you earn interest on amounts that would otherwise have already been paid for income taxes. Remember that long-term capital gains rates are scheduled to increase after 2010, so you will probably want to have the installment sale note paid off by December 31, 2010. For example, you could amortize the note on a 30-year schedule with a balloon payment on December 1, 2010.

Good luck!
Mike Gray

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this website was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.

What are the tax planning strategies for selling an investment property?

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