Selling an income property can be a lucrative decision, but it also comes with potential tax liabilities—most notably, capital gains tax. Understanding how to Reduce your capital gains exposure can help you keep more of your profits. Here are some strategies to consider:
1. Utilize the Principal Residence Exemption
If you have lived in your income property for some time, you may be eligible to designate it as your principal residence for certain years, reducing or even eliminating capital gains tax on those years. Consult an accountant to see if this strategy applies to you.
2. Optimize the Adjusted Cost Base (ACB)
Keeping track of your property’s Adjusted Cost Base is essential. The ACB includes the original purchase price plus capital improvements such as renovations. By properly documenting these expenses, you can reduce the taxable capital gain when you sell.
3. Claim Capital Losses
If you have other investments that have incurred capital losses, you can use these to offset capital gains from your income property. Losses can be carried forward or back to minimize tax exposure.
4. Consider a Capital Gains Reserve
Instead of taking the entire capital gain in one year, you can spread it over up to five years using a capital gains reserve. This can reduce your overall tax liability by keeping you in a lower tax bracket each year.
6. Sell When Your Income is Lower
If you anticipate lower income in a future year—such as retirement—it may be beneficial to delay selling your property until your income is at a lower tax bracket, reducing your capital gains tax liability.
7. Gifting or Estate Planning
Transferring property to family members or through an estate plan can have tax advantages if structured correctly. Consulting a tax professional can help you navigate the best strategy for your situation.
Consult a Professional for Tax Planning
Tax laws are complex and subject to change. Consulting with an accounting professional ensures that you take advantage of all available strategies to legally minimize your tax burden when selling an income property.
For personalized tax advice and assistance, contact our accounting firm today!