Whether you're a first-time home seller or an investor, capital gains tax can affect your finances in more ways than one. San Diego Realtor Kyle Whissel highlights what this additional expense entails for individuals looking to sell their property here locally and discusses some alternatives if they want to avoid paying capital gains tax on their sale.

What is Capital Gains Tax?

How do real estate and capital gains tie together? Hey, I'm Kyle Whissel with Whissel Realty Group, in San Diego. And I want to talk to you a little bit about capital gains and real estate, and how the two of those tie in together. And when we talk about this there's really going to be two scenarios where we're going to into capital gains. Scenario number one is going to be on your primary residence.

If you own a home, sell a home, we've talked in previous videos about the fact that, if you are single, you could keep up to $250,000 tax-free, and if you are married you can keep up to $500,000 tax-free. In the event, you've got more than 250 or $500,000 in gain, you are now going to have additional income. Well, here's the good thing, as long as you've owned that home for more than one year, that is going to be considered long-term capital gains.

And so you are going to pay your capital gains rate depending on your income, which could be up to 20%. The other scenario where you're going to run into capital gains is going to be on an investment property. So, any investment property, now, if you're flipping, if you do it in less than a year I want to make sure we're clear, 'cause I actually misunderstood this. This was a mistake I had early in my career. I was like, well, it's an investment property, it's capital gains, so I don't have to treat it like normal, ordinary income.

I was wrong. If you own a home for less than one year and you sell it, that's going to be ordinary income. You're going to pay your ordinary-income rate. So the same rate you're paying on the income from your job, you're going to pay that same rate on that gain if you held the property less than a year. Now, if you've owned the property for more than a year and you go to sell that property that's going to be considered capital gains at that point. And now any rental property, hopefully, you've owned everything over a year, so when you sell that, you've got capital gains. So on the primary residence going to be if you exceed your tax-free exemption and on your investment, it's pretty much going to be all of it.

So now you've got this capital gain. Well, what do you do with it? Now you could just pay the tax just pay the man and pay, let's just assume it's 20%. again, talk to a CPA, they'll tell you your exact rate but let's just run with 20%. You could just pay the 20%, but the cash in the bank, you're done and you can move on with your life. There are no rules or restrictions on what you do with that money. Just pay your 20%. But the thing that's become extremely common for most investors is to do something called a 1031 exchange or the longer form is a 1031 tax-deferred exchange. So let's assume you bought something for a million sold it, you end up having half a million dollars worth of gain on your investment property.

So you could pay the government a hundred grand and keep 400 of it or you could take the whole 500 in gain, you put that into an account, then you can find a replacement property of equal or greater value. And now it could be one or maybe you put two or three together. As long as the total value is greater than the property that you sold. You can now take that $500,000 gain, roll it into the new property and defer paying any capital gains taxes on it. Pretty cool, right? It's $500,000 in gain.

Just rolling into another property. Pay no taxes. Now again, want to make sure we're clear, it is a tax-deferred exchange is not a tax get rid of exchange. You're just deferring it. So if at a later date you do sell that property, you will have to pay the capital gains on it at that point but there's a strategy that's become pretty popular called swap till you drop. And that strategy is just to keep exchanging, exchanging until the day that you pass away. And then the beautiful part is let's assume the property's worth $2 million at the time that you pass, your kids will inherit that property at $2 million they could sell it and they don't have to pay tax on it.

So lots of cool, I don't know if loopholes are the right word, that's probably not the best word, but it's what it is. It's a loophole, that's okay. Any chance we get to find a loophole to work within the rules given by our beautiful government, we're going to do it. So if you're selling a property you're going to have capital gains, you should definitely look at that 1031 exchange. And then again, you just keep doing those until the day that you pass. Then the basis steps up to the value at your time of death and your kids could sell it and not pay any of those taxes. So that's the strategy to really win with investment property or even with your primary residents if you had some gain leftover after your exemption.

So if you want to learn more about that maybe you've got an investment property, you're thinking about selling, you want to roll it into something bigger, our team at Whissel Realty Group would love the opportunity to help make that happen. Give us a call, shoot us a text at the number down below, that'll connect you with our team. Love to learn more about what your goals are. Put a plan in place to help you accomplish them. I'm Kyle Whissel with Whissel Realty Group. Thanks for watching.

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