.png?width=1080&height=1080&name=LinkedIn%20with%20Light%20Blue%20Background%20(1).png)
.png?width=1080&height=1080&name=Facebook%20with%20Light%20Blue%20Background%20(1).png)
.png?width=1080&height=1080&name=Instagram%20(1).png)
High-value real estate transactions can have significant tax implications. Learn about tax-saving strategies that may help reduce liabilities when buying or selling property.
Tax-Saving Strategies for High-Value Real Estate Transactions
High-value real estate transactions—whether for investment or personal use—often involve significant financial stakes. These deals can include the purchase or sale of luxury homes, commercial properties, multi-family units, or vacation properties. While real estate can be a powerful tool for building wealth, it also comes with complex tax implications that should not be overlooked.
The timing of a sale, how a property is owned, and the specific tax strategies used can all impact the final financial outcome of these transactions. Knowing which tax-saving approaches are available can help property owners and investors reduce liabilities and make more informed decisions.
This guide explores common tax considerations and various strategies used to manage tax exposure when buying, selling, or holding high-value properties.
Key Tax Considerations for High-Value Real Estate
High-value real estate transactions are subject to multiple tax rules that can significantly impact financial outcomes. Some of the key considerations include:
Capital Gains Taxes
If a property sells for more than its original purchase price, the profit may be subject to capital gains tax. Properties held for more than a year qualify for long-term capital gains rates, which can be higher than 20%, depending on income levels. High-value properties can push sellers into higher tax brackets, increasing tax liabilities.
Transfer Taxes
Some states and municipalities impose real estate transfer taxes when ownership changes hands. These fees, based on the sale price or assessed value, can add substantial costs to a transaction.
Property Taxes
Buyers should account for ongoing state and local property taxes, which are tied to the assessed value of a property. High-value real estate often comes with a higher tax burden, and reassessments can further increase costs over time.
Luxury and Mansion Taxes
Certain states and cities impose additional taxes on high-value properties exceeding a set price threshold. These taxes, often paid by the buyer, can add a notable expense to the transaction.
Since real estate tax laws vary by location and can change over time, consulting with financial and tax professionals can help property owners navigate potential liabilities.
Common Tax-Saving Strategies
Several strategies are commonly used to reduce tax exposure in high-value real estate transactions. While not every approach suits every situation, these methods highlight ways to potentially manage tax burdens effectively.
1031 Exchanges
A 1031 exchange allows property investors to defer capital gains taxes when selling one investment property and reinvesting the proceeds into another of equal or greater value. This strategy enables portfolio growth without an immediate tax hit.
Trust Structures
Trusts can be used to transfer, manage, and potentially reduce taxes on high-value real estate holdings. For example, placing real estate into an irrevocable trust can remove it from an estate, potentially reducing estate tax liabilities.
Mortgage Interest Deductions
Interest paid on loans used to acquire, improve, or build a primary or secondary residence may be tax-deductible. For high-value real estate, these deductions can be significant. Investment properties may offer additional deductions, as mortgage interest on rental properties is often fully deductible.
Cost Segregation Studies
Cost segregation is a tax strategy that allows real estate investors to accelerate depreciation deductions by identifying and reclassifying certain property components. This can possibly lead to larger tax savings in the early years of property ownership.
Business Entity Structuring
Holding high-value real estate in a business entity, such as an LLC or S-corporation, can offer tax advantages. Pass-through taxation allows income, deductions, and credits to flow directly to the owners, potentially reducing overall tax liability. Different entity structures have unique tax benefits, making it important to evaluate options carefully.
Charitable Giving
Donating high-value real estate to a qualified charitable organization can provide income tax deductions based on the property’s fair market value. This approach not only supports philanthropic goals but may also reduce taxable income.
Advanced Planning Techniques
In addition to common tax-saving strategies, more advanced planning methods can provide additional benefits in specific situations.
- Opportunity Zone Investments – Investors who develop or rehabilitate properties in designated Opportunity Zones may qualify for tax incentives, including capital gains deferrals or exclusions.
- Installment Sales – Spreading out the sale of a property over multiple years can help reduce tax liabilities by distributing taxable gains across different tax periods.
- Conservation Easements – Property owners who agree to limit development on land with environmental or historical significance may qualify for tax deductions.
- Delaware Statutory Trusts (DSTs) – DSTs allow investors to own fractional interests in institutional-grade properties, often qualifying for 1031 exchanges.
- Family Limited Partnerships (FLPs) – These entities enable families to pool assets for real estate investments while potentially reducing estate and gift taxes.
These strategies require careful planning and legal considerations, making it beneficial to work with financial professionals who understand real estate tax implications.
Collaboration and Professional Support
Navigating high-value real estate transactions effectively often requires coordination between tax advisors, financial planners, attorneys, and CPAs. These professionals can:
Strategic Real Estate Tax Planning with EP Wealth
Whether buying, selling, or investing in high-value real estate, tax planning plays a critical role in shaping financial outcomes. To explore tax-saving opportunities for real estate transactions, connect with an EP Wealth advisor today.
DISCLOSURES:
- EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
- Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
- Hiring a qualified advisor and/or financial planner does not guarantee investment success, and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct or implied results or projections being represented here will be met or sustained.
- Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.
- EP Wealth Advisors (“EPWA”) makes no representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information presented. All expressions of option are subject to change without notice.
- All investment strategies have the potential for profit or loss. Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that any specific investment strategy will be suitable or profitable for a client’s portfolio. The risk of loss can never be eliminated even if working with a professional.
- Laws vary by state. The information presented herein is intended to be general in nature and may not apply to your state of domicile. Please consult local legal counsel to determine the best practices for your state.
- Please consult with a CPA, tax professional, and/or attorney regarding your specific situation before implementing any of the strategies referenced directly or indirectly herein.
