Understanding the tax implications of owning, buying, or selling property

Understanding and anticipating the potential tax obligations associated with property ownership are important — whether you currently own or intend to buy, sell, or inherit property.

Understanding certain strategies to minimize tax impacts with your current home may allow you to use those funds for other goals or priorities and can help you feel more prepared for whichever process you’re about to start.

When you purchase property — either as your primary home or as an investment — consider the strategies below with a tax professional to determine your eligibility and whether they’re appropriate for you.

Itemize your taxes for income tax deductions – In some instances, deductions for the mortgage interest and property taxes may lower your taxable income. These deductions typically have limits and require you to properly itemize your tax returns, so it’s best to work with a tax professional to determine your eligibility.

Lower your interest rate by buying down mortgage points – Sometimes you can pay points (or fees) to help reduce your interest rate. These points are generally tax-deductible if you meet certain requirements and itemize your deductions. Consult a tax professional to confirm eligibility and make sure you’re correctly reporting on your tax return.

Defer capital gains taxes with a 1031 exchange – If you sell an investment property, you may be able to defer the capital gains tax by reinvesting the proceeds into a “like-kind” property of the same nature or character. For example, most real estate is “like-kind” to other real estate. However, both properties in a like-kind agreement must be held for use in trade, for business, or for investment. Personal-use properties, such as primary residences or vacation homes, generally would not qualify for like-kind exchange treatment.

1031 exchanges must follow strict timing rules, and not all property types qualify. Work with a tax professional and a qualified 1031 exchange intermediary when exchanging investment properties.

Borrow against your assets with a tax-aware borrowing strategy – With this approach, you can take on debt to minimize your tax obligations by leveraging your assets — even if you have the cash to buy the property outright — to help you generate liquidity without selling your stocks or other investments. Some instances where tax-aware borrowing may be helpful include:

• Covering the cost of a large tax bill
• Making a real estate offer more competitive
• Managing cash flow

This strategy may expose you to risk if you borrow against your investment portfolio or home equity and the markets decline. Coordinate this strategy with a tax advisor to stay compliant with tax deduction rules and determine whether it aligns with your risk tolerance and overall goals.

If you decide to sell your home or purchase a new property, or if you’ve inherited a property from a family member, additional taxes may be required.

Capital gains taxes
If you sell a home or property, a capital gains tax may be required. This means the profit you make from the sale is considered a capital gain, which is subject to taxation. 

However, you may be able to exclude up to $250,000 of capital gains taxes if you’re single, or exclude up to $500,000 if you’re married and filing jointly. To be eligible for these exclusions, you must be able to prove:

• The property is your primary residence.
• You have owned and lived in the home for at least two years during the five years prior to the date of sale.
• You haven’t excluded a capital gains tax from the sale of another home within two years of your current home sale.

Additional exclusions may apply depending on your situation and state of residence, so be sure to discuss these details with a tax professional. 

Transfer taxes
Many taxing authorities impose a transfer tax when a property title transfers between parties. The transfer tax is typically a percentage of the home’s value and is paid to the state or local government.

States and local municipalities have different laws regarding transfer taxes, including whether the buyer, the seller, or both parties are required to pay all or part of the tax. Check with your local authorities and a tax advisor about transfer taxes in your area.

Title vesting structures
Vesting title in real estate refers to the legal framework that determines who holds the property title and what rights are granted to those owners. Some common vesting structures include:

• Sole ownership – One individual has full responsibility and control over the property
• Joint tenancy – Two or more people equally hold responsibility and control over the property
• Tenants in common (TIC) – Two or more people hold responsibility and control over the property, but their ownership shares can be unequal

The way you vest title to real estate can have significant legal and tax implications. Vesting title in a trust, LLC, or other entity, or owning individually by sole ownership, joint tenancy, or TIC, can affect the distribution of assets if an owner dies and may also create tax implications for heirs. Be sure to work with an estate planning professional or tax professional to ensure you understand the tax implications of the way you vest title to your property.

Understanding what tax strategies are available for you as a property owner can help you feel organized and prepared before you file any paperwork. Ultimately, everyone’s real estate tax situation will vary. Talk to a tax professional to understand more about these options and whether they’re right for you.

Still looking for extra guidance?

• Visit our tax center for more information
• Understand more about homeownership taxes
• Learn more about escrow accounts
• Review the components of a mortgage payment