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Before You Sell, Explore Your Tax-Planning Options

Selling a highly appreciated home or investment property can create a significant tax bill—but selling isn't the only thing to plan for.

Depending on how you've used and held the property, there may be strategies that allow you to exclude some gain, defer taxes, or reinvest your equity into another property.

Two important tools to understand are Section 121 and the 1031 Exchange.

Section 121: Potentially Exclude Gain on Your Primary Residence

If you've owned and lived in your home as your primary residence for at least 2 of the last 5 years, you may be able to exclude up to:

• $250,000 of capital gain for an individual
• $500,000 for a qualifying married couple filing jointly

But what happens when a property has been both your home and an investment?

That's where the planning becomes more interesting.

1031 Exchange: Defer Gain on Investment Property

A 1031 Exchange may allow you to defer capital gains and certain other taxes when you sell qualifying investment or business real estate and reinvest the proceeds into other qualifying real estate.

Instead of selling an investment property, paying the tax and then investing what's left, a properly structured 1031 Exchange can allow you to keep more of your equity working for you in your next investment.

Can You Combine the Two?

In certain circumstances, yes.

One of the more interesting planning opportunities involves a property that has transitioned between investment use and personal residence use.

For example, an investor might:

Own a rental property → convert it to a primary residence → eventually sell it

Or:

Live in a highly appreciated home → convert it to a rental → eventually sell it and use a 1031 Exchange for another investment property.

Under the right circumstances, these strategies can potentially allow you to exclude a portion of the gain under Section 121 while deferring additional gain through a 1031 Exchange.

However, there are important ownership, occupancy, timing and use requirements—and the rules become more complex when a property has previously been part of a 1031 Exchange or has been used as a rental.

The Opportunity Is in the Planning

The biggest mistake is waiting until after you've decided to sell to ask about tax implications.

The way you've used a property before the sale, what you plan to do with the proceeds, and when you make changes to how the property is used can all affect your available options.

That's why we encourage property owners to start the conversation before putting the property on the market.

Let's Look at the Bigger Picture

As part of our Discovery Meeting, we can help you evaluate your real estate situation and identify questions and potential strategies to discuss with your tax, legal and financial professionals.

We can help you explore:

• Is a Section 121 exclusion potentially available?
• Could a 1031 Exchange make sense?
• Can the two strategies potentially be coordinated?
• Should you sell, hold, convert, exchange or reinvest?
• How could the decision affect your cash flow and investment portfolio?
• How does the property fit into your retirement and estate-planning goals?

You don't have to know the answers before you call us. That's what the conversation is for.

Thinking About Selling a Highly Appreciated Property?

Before you put the property on the market, let's talk about what you may be able to do with the equity.

Tax laws and 1031/Section 121 requirements are complex and depend on your individual circumstances. This information is provided for general educational purposes and is not tax, legal or financial advice. We work with your professional advisors and recommend consulting your CPA, tax attorney and/or qualified intermediary before implementing any tax strategy.