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\n","featuredImage":{"id":"cG9zdDoyNjAyODA=","databaseId":260280,"altText":"A real estate investor visiting a commercial property.","date":"2024-08-29T02:53:50","fileSize":218830,"mimeType":"image/jpeg","modified":"2024-08-29T02:55:58","sourceUrl":"https://smartasset.com/wp-content/uploads/sites/2/2024/08/iStock-1911521670-1.jpg","__typename":"MediaItem"},"modified":{"datetime":"2024-8-29","readable":"August 29, 2024"},"multipleBylinesByRole":{"editedBy":{"id":"dXNlcjoxMTc=","databaseId":117,"userId":117,"avatar":{"url":"https://secure.gravatar.com/avatar/9fffe2eb35204e151b68731435d247c5?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"Arturo Conde is a senior editor at SmartAsset. He has a master’s from the Graduate School of Journalism at Columbia University and a bachelor’s from the College of Arts and Science at New York University. 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Capital gains tax on commercial property can vary depending on factors like the length of ownership and the taxpayer’s income level. When a commercial property is sold at a profit, the difference between the property basis and the sale price is subject to capital gains tax. Understanding how the capital gains tax is calculated is key to finding effective exemptions or strategies for minimizing the tax burden for those involved in the transaction. For complex or high-value sales, a financial advisor can work with you to manage your liability.

","

What Is the Capital Gains Tax?

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Capital gains tax is imposed on the profit made from the sale of a capital asset, such as commercial property. The amount of tax owed depends on the duration of time the asset was held before selling. There are two primary types of capital gains tax: short-term and long-term.

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Short-Term vs. Long-Term Capital Gains Tax

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Short-term capital gains tax applies to assets held for one year or less. These gains are taxed at the individual’s ordinary income tax rate, which can be as high as 37%, a significant tax burden if the property was only held for a brief period.

","

On the other hand, long-term capital gains tax applies to assets held for more than one year. The tax rates for long-term gains are generally lower than short-term rates, making it more favorable for investors who hold their assets for extended periods. The long-term capital gains tax rates are determined by income level, with different rates applying to different income brackets.

","

2024 Long-Term Capital Gains Tax Rates

","

2024 Long-Term Capital Gains Tax Rates

","

Income Level	Tax Rate
Up to $47,025 (single) Up to $94,050 (married) Up to $63,000 (head of household)	0%
$47,026 – $518,900 (single) $94,051 – $583,750 (married) $63,001 – $551,350 (head of household)	15%
Over $518,900 (single) Over $583,750 (married) Over $551,350 (head of household)	20%

","

Strategies for Avoiding Capital Gains Tax on Commercial Properties

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Unlike residential sales, there is no direct capital gains exclusion or deduction available when selling commercial real estate. Instead, the entire gain from the sale is subject to capital gains tax, but there are ways to delay capital gains taxes on land sales and commercial properties.

","

1. 1031 Exchange

","

A 1031 exchange lets property owners defer capital gains tax by reinvesting the sale proceeds of a commercial property into a similar property of equal or greater value. A qualified intermediary facilitates this process by holding the sale proceeds and ensuring they are reinvested properly. The new property must be identified within 45 days of the sale, and the transaction must be completed within 180 days.

","

2. Opportunity Zone Investments

","

Opportunity Zones are economically distressed areas where investments are encouraged through tax incentives. By reinvesting capital gains into a Qualified Opportunity Fund (QOF) that focuses on these areas, investors can defer paying capital gains tax until December 31, 2026, unless the investment is sold or exchanged earlier. If the QOF investment is held for at least 10 years, any gains from the QOF can be excluded from taxable income altogether.

","

3. Installment Sale

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An installment sale allows the seller of a commercial property to receive payments over time rather than as a lump sum. This can spread the capital gains tax liability over several years, potentially reducing the overall tax rate if the seller falls into a lower federal income tax bracket

","

4. Offset Gains With Losses

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Tax-loss harvesting involves selling other investments at a loss to offset the gains from the sale of commercial property. This strategy can reduce or even eliminate the taxable gain, effectively lowering the overall tax burden.

","

5. Charitable Donations

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Donating the property to a charitable organization before the sale can also reduce capital gains tax. The donation may be tax-deductible, and the donor may avoid paying capital gains tax on the appreciated value of the property. This strategy is most effective for those with philanthropic goals.

","

Beware of Depreciation Recapture

","

When you own a commercial property, you can depreciate its value over time for tax purposes, which reduces your taxable income each year. However, when you sell the property, the IRS requires you to “recapture” this depreciation, meaning you must pay taxes on the amount of depreciation you took.

","

Here’s how depreciation recapture works: If you sell a commercial property for more than its depreciated value, the IRS taxes the portion of your gain that comes from depreciation as ordinary income, up to a maximum rate of 25%.

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Bottom Line

","

","

Capital gains taxes on commercial properties differ between short-term and long-term gains. Short-term gains (from properties held for one year or less) are taxed at ordinary income rates, while long-term gains (from properties held for more than one year) are taxed at lower rates. Various strategies can help manage these taxes, and a financial or real estate advisor can provide the best options.

","

Tips for Tax Planning

","$40","

Photo credit: ©iStock.com/VioletaStoimenova, ©iStock.com/Yaroslav Olieinikov

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A 1031 exchange allows certain real estate investors to defer capital gains taxes when selling one investment property and reinvesting proceeds from the sale into another similar property. Taxes are only postponed, not eliminated, and investors still need to properly report 1031 exchanges to the IRS. Multiple deadlines for enacting and reporting exchanges apply, and investors also need to use specific tax forms depending on the characteristics of an individual exchange. Work with a financial advisor to craft an optimal long-term strategy leveraging 1031 exchanges to keep growing your investment real estate portfolio’s pre-tax basis and compound gains over multiple cycles.

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1031 Exchange Essentials

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Internal Revenue Code Section 1031 specifies rules that allow investors to do tax-deferred swaps of like-kind investment real estate. To qualify as allowable, the disposition of one relinquished property and acquisition of a replacement property must be parts of an integrated exchange transaction. Both the property sold and newly purchased one need to be held for business or investment use. This means primary residences or vacation homes cannot be exchanged. The relinquished and replacement properties must also be similar enough to count as like-kind.

","

Exchanges can take different forms. In a basic simultaneous swap, an investor trades one property for another directly. Another option, a deferred exchange, allows more time and flexibility to dispose of one property first, then subsequently obtain one or more replacement investment real estate assets. Reverse exchanges start with acquiring the new property, then disposing of the old one. Investors generally need assistance from exchange facilitators, who can help ensure full compliance with the multitude and variety of 1031 requirements when doing deferred or reverse exchanges.

","

Reporting a 1031 Exchange

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Even though taxes are being deferred, 1031 exchanges must be reported to the IRS. The exchange must be reported in the tax year when the investor relinquishing the property begins the exchange. That remains the case even if the transaction finishes the following tax year.

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Investors have 45 days from when they sell the relinquished property to identify potential replacement properties in writing. Then replacement property must be received and the exchange completed within the earlier of 180 days of the sale of the exchanged property that is being given up or by the due date of the tax return including extensions. Failing to meet either deadline will invalidate the deferral and require taxes to be paid as if the transaction were an ordinary sale.

","

It’s also possible to do partial exchanges involving some cash or other property that is not like-kind. In these cases, only some tax obligation might fall due currently. If the investor relinquishes property in a 1031 exchange but is unable to acquire replacement property in time, any profits could potentially still get treated as an installment sale with the gain spread over future years. Various states also have their own reporting requirements.

","

The deadline for reporting 1031 exchanges normally is the same as the deadline for filing federal returns, typically April 15 for individuals. If the exchange is not completed by then, an automatic extension may be requested, delaying the required filing date until October 15. In the event of a delay, projected taxes should still be paid by April 15.

","

1031 Exchange Forms

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Taxpayers report exchanges on Form 8824, like-kind exchanges, attaching it to their returns. The form asks for:

","

Descriptions of properties sold and purchased
Key dates including when the sold property was originally acquired and when the replacement property was identified and acquired
Any connections between the exchanging parties (either direct or indirect)
Value and basis details on properties exchanged
Calculations for any realized and recognized gains or losses

","

If the property exchanged is depreciable real estate, some taxes may have to be paid now rather than deferred. This is due to depreciation recapture rules and occurs when there are significant differences between the properties exchanged. Trading unimproved land for improved, income-generating real estate is one example of such an exchange.

","

When depreciation recapture is triggered, any gains get taxed at ordinary income rates rather than the typically lower long-term capital gains rates. The amount recaptured reflects the depreciation previously deducted on the older property. In most cases, this recapture tax obligation would need to be reported on Form 4797, Sales of Business Property, if the relinquished property was used for business purposes.

","

In some cases where the exchanged property was held just for investment, not business use, the depreciation recapture and other gains may instead get reported on Schedule D. The correct type of form, either Form 4797 or Schedule D, depends on complex factors, so consult a tax professional before filing.

","

Getting these forms right matters, because the IRS separately also gets notification of the relinquished property’s sale via Form 1099-S from the facilitator of the exchange. Form 8824 shows the tax authorities the transaction qualified for deferral through a valid 1031 exchange.

","

In any case, taxes are only deferred, not eliminated. When you later sell the replacement property in a non-exchange transaction, the original deferred gain plus any added gain gets taxed. The cost basis, which is used to determine the gain, carries over from the old property to the new property.

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Bottom Line

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Reporting 1031 exchanges properly requires tracking dates, filling out Form 8824 detailing information on properties traded and calculating any recognized gain. While taxes are postponed on these transactions, they aren’t excused forever. The tax liability on any gains is only deferred to a later sale. Keeping the right records on exchanges is critical to maintaining this deferral. If reporting isn’t done correctly, tax deferral could be canceled so that taxes are due on your next return. Since these transactions and their tax effects are so complex, consult an experienced tax professional before filing your return.

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Tax Planning Tips

","$58","

Photo credit: ©iStock/andresr, ©iStock/Thicha Satapitanon, ©iStock/nuttapong punna

"],"experts":null,"link":"/tax-filing/how-to-report-1031-exchange-on-tax-return","published":{"datetime":"2024-1-30","readable":"January 30, 2024"},"shareInfo":{"title":"When and How to Report a 1031 Exchange on Your Tax Return","origin":"/taxes/how-to-report-1031-exchange-on-tax-return"},"isNewsArticle":false},{"id":"cG9zdDoyNTU3ODk=","databaseId":255789,"postId":255789,"author":{"node":{"id":"dXNlcjoz","databaseId":3,"userId":3,"avatar":{"url":"https://secure.gravatar.com/avatar/47938df052bf0a5283bd6b77ab786737?s=96&d=mm&r=g","size":96,"__typename":"Avatar"},"description":"SmartAsset employs a team of writers and editors with years of experience in the editorial, news and personal finance industries. Some staff members also hold the Certified Educator in Personal Finance (CEPF®) designation from the Institute for Financial Literacy.","additionalMeta":{"expertise":null,"__typename":"User_Additionalmeta"},"email":null,"firstName":"Michael","fullName":"SmartAsset Team","lastName":"Carvin","name":"SmartAsset Team","postCount":{"pageInfo":{"offsetPagination":{"total":1323,"__typename":"OffsetPaginationPageInfo"},"__typename":"UserToPostConnectionPageInfo"},"__typename":"UserToPostConnection"},"slug":"mcarvin","__typename":"User"},"__typename":"NodeWithAuthorToUserConnectionEdge"},"categories":{"nodes":[{"id":"dGVybToxOTUwNw==","children":{"nodes":[],"__typename":"CategoryToCategoryConnection"},"databaseId":19507,"categoryId":19507,"link":"https://smartasset.com/tax-filing/articles","name":"Tax Filing","postCount":{"pageInfo":{"offsetPagination":{"total":90,"__typename":"OffsetPaginationPageInfo"},"__typename":"CategoryToPostConnectionPageInfo"},"__typename":"CategoryToPostConnection"},"slug":"tax-filing","ancestors":{"nodes":[{"name":"Taxes","slug":"taxes","__typename":"Category"}],"__typename":"CategoryToAncestorsCategoryConnection"},"parent":{"node":{"name":"Taxes","id":"dGVybToxMzY=","slug":"taxes","__typename":"Category"},"__typename":"CategoryToParentCategoryConnectionEdge"},"__typename":"Category"}],"__typename":"PostToCategoryConnection"},"content":"$59","date":"2024-07-31T19:02:22","excerpt":"

If you’ve made contributions to or taken distributions from a health savings account (HSA), the IRS requires you to report it on your yearly taxes. That’s where Form 8889 comes in. It details contributions, distributions and potential tax deductions so you can report all HSA-related activities to remain compliant as well as optimize your tax […]

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","

If you have questions or need help managing an HSA, consider reaching out to a financial advisor.

","

What Is a Health Savings Account?

","

A health savings account is a tax-advantaged savings account designed specifically for individuals who have qualified high-deductible health plans (HDHPs). HSAs allow you to set aside pre-tax dollars and use them for qualified medical expenses.

","

HSA contributions are tax-deductible, thereby lowering your taxable income. The funds in an HSA also grow tax-free, and qualified withdrawals for medical expenses are tax-deferred, as well. This triple tax advantage helps maximize savings and minimize the financial burden of healthcare-related costs.

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You should note that while HSA’s are only available for individuals with HDHPs, you could still keep the account and make distributions if you get different coverage, but you can’t make any more contributions.

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How Can You Use an HSA?

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","

The funds in an HSA can be used to cover the cost of medical expenses such as deductibles, copayments, prescription medications and other eligible expenses. And health savings accounts aren’t just for immediate expenses; they can be used for future healthcare needs. Unlike flexible spending accounts (FSAs), HSA funds roll over year to year. This allows you to build a substantial healthcare nest egg over time, and can be especially beneficial in retirement, when medical expenses often increase.

","

To maximize your HSA benefits, consider contributing the maximum allowed amount each year. For 2024, the HSA contribution limits are $4,150 for individuals and $8,300 for families. Additionally, individuals aged 55 and older can make catch-up contributions of up to $1,000 annually.

","

HSAs also offer long-term investment opportunities. Many HSA providers allow you to invest a portion of your funds in mutual funds, stocks, or bonds, similar to a retirement account. The earnings from these investments grow tax-deferred, providing another way to increase your healthcare savings over time.

","

How to File Health Savings Account Tax Form 8889

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Part of properly managing an HSA involves understanding the health savings account tax form 8889. This form must be filed with your tax return if you’ve contributed to or taken a distribution from your HSA. Form 8889 details contributions, distributions, and the tax implications of your HSA activities. Completing this form accurately is necessary to ensure your compliance with IRS regulations. It also ensures you maximize your tax benefits.

","

On health savings account tax form 8889, you’ll report all contributions made to your health savings account, including those made by your employer. Remember, these contributions are typically tax-deductible, reducing your taxable income. The form allows the IRS to verify that contributions don’t exceed the annual limit.

","

Health savings account tax form 8889 also requires you to report any distributions taken from your HSA. Distributions used for qualified medical expenses are tax-free, while those used for non-qualified expenses are subject to income tax and an additional 20% penalty (unless you’re 65 or older). You’ll need to refer to your plan document to see what is considered a qualified medical expense.

","

Bottom Line

","

","

Form 8889 is key when it comes to managing the tax implications of your health savings account. By accurately reporting contributions and distributions, and ensuring that distributions are used for HSA eligible medical expenses, you can fully leverage the tax benefits associated with your HSA while remaining compliant with IRS regulations. Whether you’re saving for current medical expenses or planning for future healthcare needs, understanding and correctly filing Form 8889 can help you maximize your HSA and safeguard your future.

","

Health Savings Account Tips

","$70","

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Each year, you can make a tax-free charitable gift from your IRA or certain other pre-tax retirement account. This is known as a qualified charitable distribution or a QCD. These distributions allow you to meet your annual required minimum distribution without paying taxes on that amount. To do so, you must transfer the assets from your […]

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","

A financial advisor can help you find tax-efficient ways to support favorite causes.

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What Is a Qualified Charitable Distribution?

","

For individuals age 70 1/2 or older, the IRS allows a form of charitable giving called “qualified charitable distributions.” This gift is a transfer from a pre-tax retirement account that you own, such as an IRA or a 401(k), to an eligible charity (according to the IRS) of your choice. Eligible gifts are then treated as tax-free transfers, meaning that you do not include the value of this gift in your annual taxable income.

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Eligible gifts also apply toward your required minimum distributions for the year. The result is that individuals who do not need the withdrawal can use qualified charitable distributions to take their required minimum distribution tax-free.

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To make a QCD, you must use a tax advantaged retirement account. In most cases this means a pre-tax account, and all forms of pre-tax IRA allow this type of giving. Under some circumstances you can also use a Roth IRA, but this is unusual. You must meet the age requirements for QCDs, and the recipient must be a legally qualified charity. Finally, you must transfer the assets directly from the IRA to the charity in question. The IRS will not consider this an eligible distribution if you transfer the assets to yourself and then gift them in turn.

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A QCD applies to your taxes in the tax year that the gift is received. Given the requirement that you must make the transfer directly, in most cases the giving and receiving should be contemporaneous.

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You can use any form of transfer to make a QCD. This includes direct electronic transfers or checks made payable to the charity, so long as this transfer draws directly on the IRA account. You can transfer cash or securities, based on the preferences of the recipient. The charity must provide you with a receipt or other written confirmation of the gift, and you cannot receive anything in return (like tickets to a charity event).

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Why Make a Qualified Charitable Distribution?

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A qualified charitable distribution has two key advantages. First, an eligible transfer is entirely tax-free. You do not count it as part of that year’s taxable income.

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Second, a qualified charitable distribution counts towards your required minimum distribution for the year. For example, say that you have a $7,500 RMD for 2024. If you donate $10,000 to charity directly from your IRA, you will have met the required minimum distribution for the year. This allows you to take your RMD tax-free while giving to charity at the same time.

","

However, excess qualified charitable distributions do not roll over from year to year. In the case above, for example, you would not receive a $2,500 credit toward 2025’s required minimum distributions.

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You can give tax-free each year up to the QCD cap. In recent years, this has been set at $100,000. However, effective as of 2024, this cap will be indexed upward each year. For tax year 2024, each individual can give up to $105,000 from their pre-tax retirement account tax-free. Married couples filing jointly can combine this for up to $210,000 in giving.

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This is not a tax strategy that will benefit households that need the withdrawals from their IRAs. It requires you to make a unilateral gift, which means that you will almost always give away more money than you save in taxes. However for households interested in philanthropy, it’s an excellent way to engage, while also reducing the tax impact of their required minimum distributions.

","

Bottom Line

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Qualified charitable deductions, or “QCDs,” are a way to give money tax-free from your pre-tax retirement account. As long as you follow the rules, you can give away up to $105,000 to eligible charities without including that money in your taxable income.

","

Tips for Charitable Tax Deductions

","$88","

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