A podcast listener recently reached out with a question about my portfolio:
“Clark recently mentioned that he sold most of his rental properties. I’m a few years away from doing the same thing. What, if anything, did Clark do to mitigate capital gains taxes?”
My short answer? I paid them.
Over the last several years, I’ve gradually simplified my real estate portfolio, scaling down from nine rental properties to just three. Every single time I sold a property, I paid the capital gains tax.
Here is why I chose to pay up rather than jumping through hoops to avoid the tax bill — and why you might want to do the same if you’re looking to exit real estate.
1. Don’t Let the “Tax Tail” Wag the Investment Dog
When people look for ways to defer capital gains taxes on real estate, the most common tool is a 1031 exchange.
A 1031 exchange allows you to defer paying capital gains tax if you identify a new replacement property within 45 days of selling and close on it within 180 days.
Not long ago, a gentleman came up to me completely incensed about the tax bill he was going to owe on a recent property sale. He asked me question after question about how to avoid paying it. I asked him one simple question:
“Do you actually want to own another property?”
He paused and said, “No, I just don’t want to pay the tax.”
If you no longer want the responsibilities of being a landlord, doing a 1031 exchange just to avoid a tax bill forces you right back into the very business you’re trying to leave. Never buy another asset you don’t want simply to dodge a tax bill.
2. A Tax Bill Means You Won
Nobody loves paying taxes. But paying capital gains tax means that you made money.
You held a property, managed it over the years, and reaped the benefits of long-term real estate appreciation. The tax bill is simply the price of admission for walking away with a substantial profit.
Instead of dreading the tax bill, reframe it: You owe tax because you had a successful investment.
3. Tax Rates Are Historically Low
We live in a time where the national deficit is running high because of federal spending. From a historical perspective, current capital gains tax rates are actually quite favorable.
For most long-term real estate investors, Federal long-term capital gains rates max out at 20% or less (though depreciation recapture and state taxes may apply). Taking advantage of these rates now allows you to settle your bill with the IRS and walk away with clean, unencumbered cash.
Final Thoughts
If you are at the stage in life where you want to simplify your finances and step away from property management, don’t let the fear of taxes hold you back.
Pay the tax, take your hard-earned profits from years of property appreciation, and enjoy the freedom that comes with having that cash available for your next chapter.
The post Why Clark Howard Was Actually Happy to Pay Capital Gains Tax on His Rental Properties appeared first on Clark Howard.