The Tax Bill Nobody Warns You About
Sold a rental property for $320K. Bought it for $210K. Gain: $110K.
My expected tax bill:
| Component | Rate | Amount |
|---|---|---|
| Federal capital gains | 15% | $16,500 |
| Net Investment Income Tax | 3.8% | $4,180 |
| State (Georgia) | 5.49% | $6,039 |
| Depreciation recapture | 25% on $38K | $9,545 |
| Total | $36,264 |
33% effective rate on a $110K gain. That is $36K I would never see again.
What I Did Instead
Used a 1031 exchange. Sold the Georgia property and bought a Memphis fourplex within 180 days. Total cost of the exchange: $3,200 (QI fee + legal).
Tax deferred: $36,264. Net savings: $33,064.
7 Strategies That Actually Work
- 1031 Exchange — defer 100%. Most common. 45-day ID + 180-day close.
- Primary Residence Exclusion — live in it 2 years, exclude $250K/$500K.
- Cost Basis Optimization — track every improvement. $15K kitchen reno = $15K less taxable gain.
- Depreciation / RE Pro Status — 750+ hours = unlimited passive loss deductions.
- Installment Sale — spread gain over 2-5 years, stay in lower brackets.
- Opportunity Zone — 10+ year hold = new gains permanently tax-free.
- Charitable Trust — trust sells tax-free, pays you income for life.
The Mistake Most Investors Make
Planning after the sale. Most strategies require setup BEFORE you sell:
- 1031 needs a QI in place before closing
- Installment sale needs contract structure
- Basis optimization needs documented records
Free Tools
- Capital Gains Tax Calculator — estimate your tax before selling
- 1031 Exchange Calculator — model your deferral
- Full guide: How to avoid capital gains tax on real estate
The exchange cost $3,200. The tax would have been $36,264. Plan before you sell.
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