2 Real Estate Money-Saving Tax Strategies

Principal Residence Exclusion & 1031 Exchange

How would you like a double whammy on your tax return with two awesome tax strategies?

Principal Residence Tax Exclusion

The first is the principal residence exclusion. When you sell your principal residence you can exclude up to $250,000 if you’re single or $500,000 married filing jointly on the sale of your principal residence. Many taxpayers are aware of this exclusion and utilize it each year.

1031 Exchange

The other super-powerful tax strategy for real estate is the 1031 exchange that allows you to defer the gain on your investment or business property.

People that own apartment buildings or small residential rental properties that they also occupy a portion of as their principal residence get to use both of these powerful attack strategies on the same closing statement.

A 1031 Principal Residence Example

For example let's say that you own a fourplex that's a small building with four units and you occupy one of those units as your principal residence. Let’s say that you’ve owned the property for 10 years and you've occupied that one unit which comprises one-fourth of the property for at least two of the preceding five years. So you’ve owned it for more than two years, you've occupied it for more than two years, you get to take the portion of the sales proceeds that relate to that one fourth unit as your principal residence proceeds and exclude $250,000 if you're single or $500,000 if you’re married of your gain on the sale of that unit.

The other three units that are used for rent you don't get an exclusion on, you merely get a tax deferral - meaning that you may have to pay the piper in the future if you ever recognize the gains on a subsequent sale of your replacement property. So by using these two powerful tax strategies in the same transaction you can really maximize the benefits to you and keep your hard-earned equity working for you rather than unnecessarily recognizing gains and paying taxes.

  • 1031 Hotline: If you have questions about real estate tax strategies, feel free to call me at 612-643-1031.

Defer the tax. Maximize your gain.


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