Florida is a popular destination for real estate investors, and not just because of the sunshine and beaches. The state’s favorable tax environment—especially around capital gains—offers some unique advantages for property owners. If you own investment property in Florida or are thinking about buying or selling, it’s important to understand how capital gains taxes and the step-up in basis can impact your financial decisions.
Capital Gains Tax and Your Florida Property
No State Capital Gains Tax
One of Florida’s major perks is that it doesn’t impose a state-level capital gains tax. When you sell an investment property in Florida, you only need to worry about federal capital gains taxes. That makes Florida especially appealing compared to states that layer on additional taxes at the state level.
Federal Capital Gains Overview
Capital gains taxes are triggered when you sell an asset, like real estate, for more than you paid for it. These gains are generally classified into two categories:
- Short-Term Capital Gains: These apply to properties held for one year or less and are taxed at your ordinary income rate.
- Long-Term Capital Gains: For properties held longer than a year, long-term capital gains tax rates apply, which are typically more favorable.
The exact rate you’ll pay depends on your income level and filing status. Additionally, high-income earners may face an extra federal surtax on investment income.
Ways to Minimize Capital Gains on Real Estate
1. Utilize a 1031 Exchange
A 1031 exchange allows you to defer capital gains taxes by reinvesting the proceeds from the sale of one investment property into another qualifying “like-kind” property. This strategy can be highly effective for investors looking to grow their real estate portfolio without triggering a taxable event.
2. Convert to a Primary Residence
If you live in your investment property for a certain period and meet IRS requirements, you may qualify to exclude a portion of the gain from your taxable income. This approach requires careful planning, but it can provide significant tax savings if your circumstances align.
3. Hold the Property Until Death
When investment property is passed on through inheritance, the cost basis of the property typically receives a “step-up” to its fair market value at the time of the original owner’s death. This step-up can drastically reduce or even eliminate capital gains taxes for heirs if the property is sold shortly afterward.
Step-Up in Basis Explained
The step-up in basis is one of the most powerful tools in estate and tax planning. Here’s how it works: if a property was originally purchased at a much lower price and significantly appreciated in value over time, the heirs inherit it with a new basis that reflects the current market value—not the original purchase price.
This means if the heirs sell the property soon after inheriting it, they may owe little to no capital gains taxes. Florida also doesn’t impose an inheritance tax, making this strategy even more attractive for families looking to pass on real estate assets.
Final Thoughts
Florida’s lack of state-level capital gains and inheritance taxes, combined with strategic tools like the 1031 exchange and step-up in basis, makes the state a haven for real estate investors. However, tax laws are complex and subject to change, so it’s crucial to consult with a qualified tax advisor or real estate attorney before making major decisions.
By understanding the key rules and planning carefully, you can make the most of your investment property—and potentially preserve more wealth for the future.
By: Danielle Vaughn, Board Certified Real Estate Attorney