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EXIT 01: How to Reduce Capital Gains Taxes on Real Estate with Passive Losses & Tax Loss Harvesting

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In this episode, Brandon Hall and Thomas Castelli discuss how to use capital losses (tax-loss harvesting) and passive losses to reduce capital gains taxes from the sale of your rental real estate. 

One of the best things about real estate is that you have all these different strategies that you can use to minimize or eliminate taxes on the sale of your assets.

The exit is where you're probably going to recognize the biggest gains or the biggest taxable events for your real estate. That's why you want to pay attention to what exit strategies are going to help you minimize your taxes on that exit and take advantage of the time value of money.

Here are two strategies:

Capital Losses (Tax-Loss Harvesting)

If you have a capital gain from the sale of real estate, or any capital asset, like a stock, you can just take the capital losses and offset them.

The way this strategy works is that you sell your assets that are in a loss position, you recognize that capital loss, and then you use it to offset a capital gain, whether it be in that year, or in a future year. 

To use this strategy, you have to look at the assets that are at a loss and ask yourself, "will they recover?" If the answer is no, there is likely that the probability of recovering is extremely low. You can then go ahead and sell those, and then use those to offset the capital gain at some point in the future.

Passive Losses

You can use passive losses to offset your capital gains on the sale of your rental real estate or even syndicates investments.

When you buy a property, you're going to have a depreciation expense. Residential property is depreciated over 27 and a half years, commercial properties depreciate over 39 years.

You can use a cost segregation study to accelerate the depreciation of certain components.

When you combine that increased depreciation expense with your overall operating expenses - property management fees, repairs, maintenance, property taxes, utilities, you are usually going to have a sizable loss.

That is going to be called the current passive loss which you can use to offset any current passive income, any net passive income, or gains from passive activities. You can always go ahead and buy a property in the same year you sell another property to create current passive losses.

You can also use suspended passive losses to offset capital gains, suspended passive losses are simply current losses from prior years that you weren't able to utilize.

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After working with multiple CPAs, we didn't think we'd ever find the right one. However, working with The Real Estate CPA was easy, quick, and efficient. They answered all our questions till we understood, this is exactly the kind of relationship we were looking to build with our CPA so that we can grow our tax knowledge.

Dominic and Jessica Franco - Business Owners