Understanding Tax Implications When Selling Your 2-4 Unit Property in CT: The Basics and Beyond

Posted by HOMESELL – Your Specialist in 2-4 Unit Property Sales 

Selling a 2-4 unit property in Connecticut can be both rewarding and daunting, especially when you think about the tax implications. As a leading brokerage firm in this niche, HOMESELL is here to guide you through the essentials.

Is it Capital Gains Tax? 

Absolutely, when you’re selling a real estate property, including 2-4 unit properties, any profit you make over your original purchase price (and adjusted base price) is subject to capital gains tax. This tax applies to the profit, not the entire sale amount, and is categorized into two: 

1. Short-term capital gains: If you owned the property for less than a year, the profit falls under short-term capital gains and will be taxed at your ordinary income tax rate. 

1. Long-term capital gains: If you owned the property for more than a year before selling, the gains will be taxed at a reduced rate. This rate can be 0%, 15%, or 20% depending on your taxable income. 

The Golden Rule: 2 out of 5 Years Residence Exemption 

Now, here’s a silver lining for homeowners. If you’ve lived in the property as your primary residence for at least 2 out of the last 5 years leading up to the sale, you can exclude a significant portion of your profit from capital gains tax. Single filers can exclude up to $250,000 and those filing jointly can exclude up to $500,000. 

This provision was put in place to ease the tax burden on homeowners. It means, for many, selling their multi-unit property might be tax-free if they’ve resided in one of the units for the qualifying period and the profit is within the exemption limits. 

Strategies for Tax Efficiency 

While we’ll delve deeper into comprehensive tax avoidance strategies in other posts, it’s essential to touch upon a few general options: 

1. Consider a 1031 Exchange: If you reinvest the proceeds from your property sale into another “like-kind” property, a 1031 Exchange allows you to defer paying capital gains taxes. However, specific rules must be followed to qualify. 

1. Assess Property Improvements: Capital improvements made over the ownership period can increase the adjusted basis of your property, potentially reducing your taxable gain. 

1. Evaluate Depreciation Recapture: For rental properties, depreciation deductions taken over the years can affect your capital gains tax. Any depreciation claimed will be “recaptured” and taxed at a maximum rate of 25%. 

Conclusion 

Navigating the tax landscape when selling your 2-4 unit property doesn’t have to be overwhelming. By understanding the basics of capital gains tax, taking advantage of residential exemptions, and considering tax-efficient strategies, homeowners can make informed decisions that best benefit their financial future. 

Remember, every individual’s tax situation is unique. Always consult with a tax professional or real estate expert familiar with CT properties for tailored advice. At HOMESELL, we’re here to help at every step of your property sale journey.