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Dealing with capital gains tax

By ERIC FEICHTHALER - Real Estate Law | Oct 29, 2020

Eric Feichthaler

Dear Mr. Feichthaler,

Could you please write an article about capital gains tax? My understanding is that it is a federal tax rule, are there any differences by state? And are there any ways legally to avoid the tax?

Thank you so much. I enjoy your column.

Take care

— Jennifer H., Cape Coral

Dear Jennifer:

As property values rise, this is an excellent time to answer your question. First, federal capital gains tax apply, generally speaking, when the owner of an asset sells it for more than he or she paid for it. These assets include real estate. The federal rate can vary depending on your income, but is generally lower than the seller’s highest ordinary income tax rate. The highest rate is typically 20%, which is taxed on the profit only. As an example, if you buy a rental home for $100,000 and sell it for $170,000, only the $70,000 is taxed. Capital gains rates apply for assets held at least one year, otherwise it is taxed at the ordinary rate.

Thankfully, in Florida, there is no personal income tax, therefore there is no state capital gains tax, only Federal. However, many states do have personal income taxes, and may tax capital gains differently by state. So, if you sell real estate located in a state that has an income tax, you will want to check with your tax advisor or attorney to see if state capital gains will apply.

There are several ways to minimize capital gains tax on real estate, even eliminate it. First, a seller can seek to include all major improvements to the property in the amount paid for the property, which would reduce the net profit on the sale. Another option many of my sellers use is a 1031 like-kind exchange. In summary, as long as the seller uses the funds to purchase another investment property within a certain time period, and has a third party (qualified intermediary) hold the funds, the IRS will treat the two investment properties as one, as if the original sale was never made. As a result, no tax is due on the sale if a replacement property is purchased for more than the amount sold. If one were to continue to execute 1031 transactions into the future, no tax would ever be due, until a sale was made where the funds were not placed in a new property.

One major way clients avoid capital gains taxes completely is when they sell their primary residence. As long as the seller lived in the property for two years, generally the gain in value is exempt from capital gains tax. Finally, when an owner dies while owning real estate, the heirs or beneficiaries of the property receive the property based on the “date of death,” or current, market value. Therefore, if the heir sells the property soon after the death of the owner, there will be no tax due from the heirs or the estate of the original owner.

Matters of tax planning and estate planning can be complicated, and are unique to each taxpayer’s situation. I encourage anyone to seek professional advice from an attorney or Certified Public Accountant to obtain the greatest benefit, and stay out of the IRS’ crosshairs.

Eric P. Feichthaler has lived in Cape Coral for over 33 years and graduated from Mariner High School in Cape Coral. After completing law school at Georgetown University in Washington, D.C., he returned to Southwest Florida to practice law and raise a family. He served as mayor of Cape Coral from 2005-2008, and continues his service to the community through the Cape Coral Caring Center, Cape Coral Historical Museum, and Cape Coral Kiwanis. He has been married to his wife, Mary, for over 20 years, and they have four children together. He earned his board certification in Real Estate Law from the Florida Bar. He is AV Preeminent rated by Martindale-Hubbell for professional ethics and legal ability, and is a Supreme Court Certified Circuit Civil Mediator.

Mr. Feichthaler can be reached at eric@capecoralattorney.com, or (239) 542-4733.

This article is general in nature and not intended as legal advice to anyone. Individuals should seek legal counsel before acting on any matter of legal rights and obligations