2 Ways to Defer Capital Gains Tax in Real Estate Investing
While no one enjoys taxes, we should never avoid payment of any taxes rightfully owed. I enjoy driving on paved roads, going to national parks, and being able to enjoy all the things that my taxes help fund. Nonetheless, there is absolutely no reason to pay taxes you don’t legally owe. It is your right to follow the rules to eliminate unnecessary taxes. Supreme Court Justice Learned Hand once said, “There is nothing sinister in arranging one’s affairs so as to keep taxes as low as possible. Everybody does that, rich and poor and they all do right. Nobody owes a public duty to pay more than the law demands. Taxes are enforced exactions and not voluntary contributions.”
So, what are some ways that you can defer payment of capital gains taxes?
1. A 1031 Exchange
One way to defer capital gains tax while investing in real estate is to carry out a 1031 exchange. A 1031 gives you the ability to exchange one investment home for another without the burden of capital gains tax. While there are strict requirements all can be easily met.
2. Qualified Opportunity Zone
Opportunity Zones are new and still very much in a growing process. That being said, if you have always wanted to invest in Guam or Puerto Rico, there has never been a better way. Investments are made through Qualified Opportunity Funds and subject to numerous tax benefits. The island of Puerto Rico is considered a Qualified Opportunity Zone and is essentially a tax-free place to invest. For a map of qualifying areas look here.
While it is easy to get excited over the prospect of deferring tax, always make sure to consult with your local tax expert before making any big decisions.