By Matthew Fatz, CFP®
For most families with significant investable assets, tax planning is a uniquely complex endeavor. Tax rules surrounding real estate can be especially complicated.
While it’s always a good idea to check with your advisor to craft a fully personalized strategy, these six tax-smart real estate moves can help point you in the right direction when you’re looking to generate new wealth while reducing tax liabilities.
1. Downsizing the Primary Residence
Downsizing represents a powerful but underutilized strategy. If you sell your primary residence, you can exclude up to $500,000 of capital gains from your taxes (for married couples).
But what if your gains surpass the exclusion amount? In that case, making the sale in a lower-income year can greatly lower your effective rate.
2. Vacation Homes: A Misunderstood Property Type
How your vacation home is classified for tax purposes has the power to dramatically affect tax liability. Vacation homes generally fall into one of these classifications:
- Personal-use property
- Rental property
- Mixed-use property
The “Augusta rule” allows you to receive rental income tax-free if you rent out a property for less than 15 days in a tax year. If you rent your vacation home out for more than 15 days, your rental income and expenses are split based on personal and rental days. This often limits your deductible losses.
3. Estate Planning Levers: QPRTs and Trusts
If you intend to pass a vacation home or primary residence on to beneficiaries but want to reduce or eliminate estate taxes, you might consider a qualified personal residence trust (QPRT).
With a QPRT, you transfer a personal residence to an irrevocable trust while retaining the right to live in the home for a fixed term. If you survive the term, the residence passes to the beneficiaries, or remains in trust for them, outside your taxable estate, subject to the trust terms. If you die before the retained term ends, the home’s fair market value at death is generally included in your gross estate under IRC §2036 because your retained right to use the residence did not end before death.
4. Entity Structuring for Multi-Property Families
If your family owns multiple properties, a family LLC or family limited partnership (FLP) might help reduce taxable gift values when transferring ownership interests.
For some families who have a primary residence, a vacation home, and multiple rental properties, it can make sense to separate LLCs per property. Done properly, this setup can offer liability insulation while creating clean valuation units.
5. 1031 Exchanges and Opportunity Zones
With a §1031 like-kind exchange, you can defer capital gains when selling one investment property and buying another. This move can be particularly useful if you want to consolidate holdings or make a major geographic shift.
If you reinvest proceeds from the property sale into a Qualified Opportunity Zone, you may be able to defer, or even exclude, capital gains taxes from a property sale.
6. Key Planning Principles
Regardless of which strategies you decide to use, keep the following in mind:
- Involve your advisor in the term-sheet stage, as tax strategy ideally should drive deal structure.
- More often than not, these strategies work best together, not in isolation.
- Be mindful of the fact that state tax implications layer on top of federal.
Oftentimes when I’m working with families, the most important conversation is focused on how to integrate strategies alongside Roth conversions, income planning, and other long-term wealth management strategies.
Let Us Help You Explore Tax-Smart Real Estate Strategies
At Thrive Wealth Management, LLC, we understand the importance of tailoring your family’s long-term wealth management strategy to your unique needs. Real estate can be a powerful driver of wealth, but if you aren’t paying attention to tax consequences, there’s a real chance that you could see that wealth erode over time.
If you’re interested in how our team may be able to help you, contact us online today. To schedule a meeting, call (215) 376-5530 or email mfatz@thrivewealth.com.
Frequently Asked Questions
How can tax-smart real estate strategies fit into a broader wealth management plan?
Tax-smart real estate strategies can complement a broader wealth management plan by coordinating property decisions with investment management, retirement planning, tax planning, and estate considerations. For many high-net-worth families, the value can come from understanding how each real estate decision affects the overall financial picture rather than evaluating properties in isolation.
What are some common tax-smart real estate strategies for high-net-worth families?
Common tax-smart real estate strategies may include evaluating the timing of property sales, using 1031 exchanges for investment properties, considering qualified personal residence trusts (QPRTs), reviewing entity structures for multiple properties, and incorporating depreciation planning where appropriate. The right approach depends on a family’s goals, income situation, and overall financial circumstances.
When should I talk to a financial advisor about tax-smart real estate planning?
Ideally, conversations about tax-smart real estate begin before a property is purchased, sold, transferred, or gifted. Early planning can create more flexibility when evaluating available options. At Thrive Wealth Management, we work with families to coordinate real estate decisions alongside broader financial planning considerations, helping clients evaluate how potential moves may affect taxes, cash flow, and long-term wealth objectives.
About Matthew
Matthew Fatz, CFP®, is a Financial Planner at Thrive Wealth Management. He brings an approachable style to the table and centers every client’s plan around their goals and dreams (not spreadsheets or markets).
This material is provided for informational and educational purposes only, should not be viewed as an exhaustive discussion of the topics presented, and should not be construed as individualized advice for any reader’s personal circumstances. For guidance on how these matters may impact your financial plan or investment portfolio, please contact your Thrive Wealth Management, LLC representative. While the information presented is believed to be factual and up to date, Thrive Wealth Management, LLC does not guarantee its accuracy and, due to various factors, including but not limited to changing laws and regulations, this information is subject to change. All expressions of opinion reflect the judgment of the authors as of the date of publication. Thrive Wealth Management, LLC is not a law firm or an accounting firm, and no content contained herein should be construed as legal or accounting advice. Please consult with the qualified professional(s) of your choosing for legal and accounting advice.
Please visit https://thrivewealth.com/disclosure for additional information regarding the professional designations and credentials discussed. Professional designations and credentials do not guarantee success or any particular investment or financial outcome.
Past performance does not guarantee future results. All investing comes with risk, including risk of loss.
