How to Reduce Capital Gains Taxes on Your Vacation Home

Are there any strategies to mitigate capital gain tax on the sale of a vacation home? Can you no-tax your vacation home? Toby Mathis and Michael Bowman of Anderson Advisors answer your questions about how to mitigate capital gains taxes. Submit your tax question to taxtuesday@andersonadvisors.

Highlights/Topics:

• For a partnership LLC, can capital gains (such as stock sale) from brokerage account owned by the business be combined/offset with real estate losses *such as depreciation) in the LLC? It depends on the type of real estate. If it's rental real estate, no, unless you’re a real estate professional or active participant in real estate, and you make less than $150,000.
• When I sell a property for 1031 exchange, can I sell 100% ownership of the owning LLC instead of the actual real estate to avoid the transfer taxes, title fees - assuming the LLC is single owner and only owns the subject property, nothing else? You can’t do a 1031 exchange of an entity to try to avoid the transfer taxes and title fees, nor should you. Technically, the change of ownership of an entity, even 50%, is a deemed sale of the underlying asset.
• If I buy an existing home inside an opportunity zone will I be able to save tax on the capital gain, if I keep the property for 10 years? You can buy a piece of property, but you have to double its depreciable basis. If you do that and hold it for at least 10 years, you could step up the basis on any given year to its fair market value and avoid tax on the growth of that asset. Yet, you have to recognize the deferred gain in the 2027 period.
• Our vacation home is in another state and it's solely for personal use and never rented. We've owned it for 10 years. Are there strategies to mitigate capital gains tax on the sale of a vacation home? Do we have to make it our primary residence for two years before we can sell it and get the capital gains exemption? You have to live in your vacation home as your primary residence for two years prior to selling it. Or, make it into an investment property and do a 1031 exchange.

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Resources:

Capital Gains and Losses

https://www.irs.gov/taxtopics/tc409

1031 Exchange

https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips

Opportunity Zones

https://www.irs.gov/credits-deductions/businesses/opportunity-zones

Toby Mathis

http://tobymathis.com/about-toby-mathis/

Michael Bowman

https://andersonadvisors.com/michael-bowman/#:~:text=Michael%20B.,Nevada%2C%20Arizona%2C%20and%20Washington.

Anderson Advisors

https://andersonadvisors.com/

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