Simple Ways to Keep More of Your Money When You Sell Your Rental Property

What is Capital Gains Tax, Anyway?

Before we jump into the tips, let’s quickly talk about what capital gains taxes are.

A capital gain happens when you sell something you own—like your rental property—for more than you paid for it. The profit, which is the difference between what you paid (plus any money you spent on fixing it up) and the final sale price, is called your capital gain.

The capital gains tax is what you pay on that profit. It’s a little different from other taxes, like income tax. For one thing, you only pay it when you actually sell the property. Also, the tax rate for capital gains is sometimes different from your regular income tax rate.

Two Kinds of Capital Gains Tax

• Short Term Gains: If you sell a property you’ve owned for a year or less, that profit is called short term. It gets taxed just like your normal job income. Depending on how much money you make, that can take a huge bite out of your profit.
• Long Term Gains: If you’ve owned the property for more than a year, you pay the long term rate, which is usually lower. Just waiting a few extra months before selling can often save you a lot of money.

7 Simple Ways to Save on Taxes

1. Swap Properties with a 1031 Exchange

The 1031 exchange is one of the most popular ways property investors stop themselves from paying taxes right away. It lets you sell one investment property and use all the money to buy another investment property without paying the tax bill immediately.

Think of it as simply swapping one house for another and putting a pause button on the tax bill.

Why this works:

• You use the money to buy something new instead of taking the cash.
• The tax is put off until you eventually sell the new property way down the road.
• It lets you keep making your real estate portfolio bigger.

Heads up: The rules are strict. You have 45 days to find the replacement property and 180 days to finish the entire deal. Follow the rules, and this can be an incredibly powerful tool.

2. Just Live in the Property Yourself

If you move into your investment property and live there for at least two of the last five years, you might qualify for the home sale exclusion. This is a great way to save on taxes. This rule can make up to $250,000 of your profit tax-free if you are single, or up to $500,000 if you are married. All you have to do is actually live in the house for the needed time and meet the other requirements. A large part of your profit could then stay right in your pocket. It’s a simple plan that doesn’t need fancy steps, and if it fits your life, it can be the easiest way to save on taxes while still enjoying the money from your sale.

3. Keep Good Records of Improvements

Here’s an easy tip that many owners forget: keep detailed receipts and records of every single time you upgrade your property. It could be a new roof, a fixed up kitchen, some fresh paint, or big plumbing repairs. These costs all get added to your property’s original price. This is important because it lowers the amount of profit that the government can tax when you sell. So, the more improvements you can prove you spent money on, the less profit you pay tax on. Every receipt, bill, or note about upgrades is important. Keeping track is a simple step that can save you a lot of cash later on.

4. Just Wait Longer Before Selling

How long you own a property makes a huge difference with capital gains taxes. Properties sold after being held for over a year are considered long term. Long term profits are usually taxed at a much lower rate than short term profits. This means that sometimes the absolute simplest way to save on taxes is just to wait a little longer before you sell, even if you really want to cash out right now. A little patience can go a long way in letting you keep more of your profit and helping your investment work harder for you.

5. Use Other Losses to Cancel Out Gains

If you have other investments that have lost money, you can use those losses to reduce the gain from selling your property. This is called tax-loss harvesting, and it’s a legal way to lower the income you pay taxes on and reduce your total tax bill. Even if your house sale made money, selling another investment that lost value can help balance things out and lower what you owe in taxes. It’s a practical plan that a lot of investors don’t think about, but it can make a real difference when tax time comes without adding any risk.

6. Check Out Opportunity Zones

Opportunity Zones are special parts of the country that encourage new building and development. If you invest the money you made from your sale into a special fund in one of these zones, you can:

• Wait a while before paying taxes.
• Maybe pay even less tax if you keep the investment for a long time.

This is a way to make your money grow while also helping communities get better.

7. Think About an Installment Sale

Instead of getting one huge payment when you sell your property, you could set up the sale so the profit is paid out over several years. This plan can keep you in a lower tax bracket and reduce the amount of tax you pay each year. It’s a steady and predictable way to sell that many property owners don’t consider, but it can be really helpful if your profit is large and would normally push you into a higher tax rate. By breaking up the payments into smaller chunks, you pay taxes slowly instead of all at once, which makes managing your money much easier.

Capital gains taxes don’t have to take a huge bite out of your profits if you take the time to plan things out beforehand. By using tips like the 1031 exchange, living in the house for a while, keeping track of repairs, and being smart about when you sell, you can keep more of the money you worked hard to earn. The main thing is to understand your choices and pick the one that works best for your situation. That way, you won’t pay more than you need to. When you plan carefully, selling your investment property can feel exciting and rewarding instead of stressful. With the right approach, you can really enjoy the benefits of your investment and keep your profits working for you. You did the work, and now it’s time to make your money work for you.

Ready to sell your investment property and keep more of your profit? A-Line Realty can help you every step of the way and make the process easy and stress-free.