If you read my blogs and watch, or listen to, my podcast, you probably know that I don’t often sell real estate … at least not for several years. While I typically hold real estate as a long-term investment there are times when I’ve sold earlier than normal. In fact, I’ve sold real estate in order to do something that’s called a “1031 Exchange.”

What that means is, usually when you sell a stock, or a bond, or an asset, you have to pay taxes. But, with the federal code called the “1031 Exchange” you’re able to take that and buy like-kind exchange of other real estate. So, I would sell the property, not pay tax, and roll it into a new piece of real estate. This is something that I’ve done a few times.

In addition to the “1031 Exchange” below are some more ways that you can legally manage taxes in real estate transactions.

First, you can see if you qualify for a capital gains exclusion for your primary residence. This is a tax benefit in the U.S. that allows homeowners to exclude a certain amount of capital gains from the sale of their primary residence from their taxable income. To qualify, you must have owned the property for at least two out of the five years before the sale. And, the property must have been used as your primary residence for at least two of the five years before the sale.

For individuals, the maximum exclusion is $250,000. For married couples filing jointly, the maximum exclusion is $500,000. And, the exclusion can be claimed once every two years.

It is important to point out that the exclusion applies to capital gains, which are the profits from the sale of the home. It does not apply to other potential taxable items, such as depreciation recapture or gains on any portion of the property used for business purposes.

Additionally, you can manage taxes by looking into any available tax credits or incentives for real estate transactions. Those could include energy efficiency credits or incentives for investing in low-income housing.

As a real estate investor, you might also be eligible for depreciation deductions. These deductions could allow you to deduct a portion of your property’s cost over time, reducing taxable income.

Another area to look into is tax-advantaged accounts. You could consider investing in real estate through tax-directed accounts. Those can include a self-directed IRA or a 401(k) if you’re eligible.

It’s critical to note that tax laws can be complex, so you should certainly seek professional advice to make sure that you are in full compliance. Engaging in illegal tax evasion schemes can lead to severe legal consequences and damage your financial standing.

Maintaining ethical and legal practices is not only the right thing to do but also helps build a solid and reputable business in the long term. So, be bold, be confident, but be safe, and be smart!