Figuring out ways to avoid capital gains tax on your investment property can ensure significant savings on your property sale. Still, many first-timers are overwhelmed with the thought of having to pay a big chunk of their hard-earned investment growth to cover the costs of capital gains tax. Fortunately, however, there are ways to get around this. Let’s find out how you can avoid capital gains tax or, at least, reduce the amount you have to pay.
1. Use Your Investment Property As Your Primary Residence
When you acquire an investment property for sale in Washington DC and start living in it for some time, you can get your asset listed as a Primary Place of Residence or PPOR. PPORs are exempted from the Capital Gains Tax.
Keep in mind, however, that you may not be able to declare your property as a PPOR if you rent it out immediately after acquisition and then move in at some later date. Even in that case, however, you’ll be partially exempted from the CGT saving an amount proportionate to the number of years you lived in as compared to the number of years rented.
Seasoned house flippers often list their investment properties as PPORs during renovations to reduce their tax burden. If you meet the criteria above, you can always claim the primary residence deduction at the time of selling the property. Just ensure that you have the documented proof that you’ve lived in that property for the most part of the year. This could be anything like tax filing and mailing address.
2. Take Advantage Of The CGT 6-Year Rule
According to the CGT 6-year rule, you can use a primary place of residence as an investment property. All you have to do is to rent it out for up to a period of six years. So, if you’re planning on selling your property in the next six years, you won’t have to pay any CGT.
This rule is also appealing to the property owners who always want to make some extra income for periods when they are not able to stay at their primary residence for one reason or the other.
3. Get Partial Exemption For 12-Month Ownership
If you can’t claim a full CGT exemption because your investment property for sale in Washington DC doesn’t qualify as a PPOR, you should look for a partial exemption. For instance, you can claim a 50% discount on the capital gains tax if you’ve owned an investment property for 12 months, at least, before you decide to sell it.
4. Track The Expenses
Tacking all your expenses incurred from improving and selling your investment property can also help you bring down the CGT significantly. Keep estimates, receipts, and invoices from all the contractors and make a running list of all the improvements made to your property. It will help lower the taxes as the tax will only apply to the capital gains you have made from the property and not the expenses.
If you are planning to sell your investment property in Washington DC, thedcteam.com can assist you to grab the best deal. Our experts can also help you with the tax matters and sweeten the deal further.