Want to sell or rent your residence tax-free?
Do you want to sell or rent your personal residence in Crested Butte tax-free?
Hey guys, Heather Connor here with Black Diamond Resort Group and I am here to answer your question is it possible for you to either reduce your taxes or potentially rent your home tax-free, and the answer is yes, and it does just take a little bit of understanding of the structure to make this happen.
How to gain tax benefits on your rental property in Crested Butte.
So first of all you may ask, why would I rent my personal residence? Now that’s a great question. Here in Crested Butte, there’s a lot of reasons that these situations can occur. For example, you may decide to go on a trip for a year, and when you decide to rent your home, how do you handle that? Do you just take your home, put it on the rental market, and start accepting rent payments? Absolutely you can do that, but you’re missing out on a huge tax benefit. Based on the reason why you might choose to rent your personal residence, there is a proper way you can handle this so that you can either save an astronomical amount or the full amount on taxes and knowing the rental rates of what we can get for our properties here in Crested Butte, this is a huge benefit.
So I’m going to take you step-by-step through this, and you may have more questions for me after this. If you do, please feel free to reach out to me. Now my disclaimer is that I’m going to share and forward you information about some different tax strategies that I am learning to help you as my client make sure that you’re getting the most benefit. Remember though that I am a real estate agent, I am not a CPA, an attorney, or a tax attorney, so these are merely my attempt to share with you that there are strategies available and give you the nuts and bolts. As far as implementation, that is something that I really suggest you either hire a qualified person or again, feel free to reach out to me and I’ll be happy to put you in touch with the folks that handle all of these tax strategies for us. Number one you have your primary home and you decide to rent it, so the very first thing that you want to do is you create a separate Corporation and you’ll create an S Corp. When you create this S Corp, that will actually be owned by you as well and then what you will do is you will take your primary residence and you will actually sell it to that S Corp.
Setting up an installment plan on your rental property.
Now, let’s use some numbers, just a round number here. Pretend that you own your home and you bought it for $500,000 back in the day, and that you and your partner still own the property and you plan on selling to this S Corp. Pretend that today’s value is $1,000,000 to keep it very simple. So your potential capital gain in that property is $500,000. Now you may be asking why I’m mentioning this, this comes up later. So what happens is, there’s an increase of $500,000 when you actually sell this property from yourself to your new S Corp, which you own. Now what happens is that S Corp is going to pay you back, and you’re going to want to set it up so it’s paid back to you on an installment plan. For those of you that aren’t familiar, an installment plan is when essentially you take the full amount and you’re actually paying it off in installments back to the other party. So pretend that you set up an installment plan that was for 20 years. What will happen is that the S Corp will make installment payments to you and pretend off of a million dollars you’re gaining $7,000 a month. Now pretend that the income you’re receiving is also $7,000 a month. Essentially what is happening is the S Corp has an inflow of income of $7,000 a month and then also has an outflow of expense of $7,000 a month to you for that installment plan. So essentially they are netting $0 unless you’re getting taxed on $0.
Selling your property tax-free in Crested Butte.
So that’s great, you’re renting your property and eventually, someday you’re going to want to sell it. So what does that mean? Now the cool part of this is that when you do decide you want to sell your residence, this also works in your favor. So in the future you say, “I really am selling my property,” and what you do is you choose to have that installment plan come due that year. Then that extra $500,000 gain in capital gains that you receive, if you are married filing jointly, you get that $500,000 capital gains that you do not pay tax off of. If you’re single, it’s $250,000. Now if you are married filing jointly, and your property has increased $500,000 and you decide that you really are going to sell your primary residence, and you’ve been renting it through this installment plan to gain that tax-free advantage, what happens is like I mentioned, you call that installment plan due that same year, and then you still qualify for the IRS tax code 121 which says that you can actually sell your residence for $250,000/$500,000 and gain that income tax-free on your personal residence. So again, I hope that makes sense and if you guys have any more questions feel free to reach out to me absolutely, and if you’re interested in implementing this and not sure where to start, I’d be happy to put you in touch with some folks that can get this started for you immediately. This is Heather Connor again at Black Diamond Resort Group, thanks for joining me.