Capital Gains Tax Question

[Moises G.]

I have a client who may need to sell his residential non-owmer occupied property in Malibu California asap. His biggest concern in doing this is the capital gains tax he would have to pay on it. His property is worth about $1.8 million, is there any creative way for him to avoid paying a large some of capital gains taxes? Any help would be greatly appreciated. Thanks in advance.

[Dave Toelkes]

The only way your client can avoid the tax completely on his potential sale profit is to die and let his heirs inherit the property at a stepped up basis.

There are no capital gains to be taxed if your client holds the property, or, sells for no profit (breakeven or at a loss). If these are not viable options, then there is no way to avoid paying capital gains taxes if the property is sold at a profit before your client dies.

Your client could reduce the amount of capital gains that might be taxed by moving back into the house and occupying it as his primary residence for two years or more. Then he can exclude up to $250K ($500K MFJ) from capital gains on the sale of his primary residence.

The capital gains tax can be deferred (indefinitely) with a 1031 exchange instead of a sale provided your client wants to continue to own investment real estate.

An installment sale will spread the capital gains tax out over several years, reducing the amount of tax paid in a single year. If the capital gain would trigger AMT, your client might want to use the installment sale to reduce the amount of capital gain he recognizes in any single year.