Avoid Tripping on the Following Tax Traps

• Trap #1: Selling depreciated property. Depreciation reduces taxable income during ownership, but it isn’t free. When you sell, prior deductions are taxed through something called depreciation recapture. This can significantly increase your tax bill, especially for long-held properties with substantial write-offs. Many investors overlook this and underestimate their liability.
  
  Tax tip: Before selling, calculate how much of your gain is tied to depreciation and consider strategies like timing the sale or using a like-kind exchange to manage the impact.

• Trap #2: Cash attached to like-kind exchanges. Speaking of like-kind exchanges, these transactions allow you to defer taxes when swapping real property assets. Introducing cash into the deal, however, can trigger an unexpected tax. Any cash received is immediately taxable, even if most of the transaction qualifies for deferral. This often happens when debt isn’t fully replaced or values don’t align precisely.
  
  Tax tip: Structure exchanges carefully by matching both property value and debt, and work with a qualified intermediary to avoid accidentally creating taxable cash.

• Trap #3: The net investment income tax. Once your income exceeds certain levels, a 3.8% surtax applies to some or all of your passive income for that year. A one-time event such as selling property or investments can unexpectedly push you over the limit.
  
  Tax tip: Before major transactions, model your total income to see if you’ll trigger the surtax and explore timing strategies to minimize exposure.

• Trap #4: Tax losses you can't use. Passive activity loss rules can prevent you from using losses when you expect to. Rental real estate and other passive investments often generate losses on paper, but these losses are generally limited to offsetting passive income. If you don’t have enough passive income, the losses are suspended and carried forward.
  
  Tax tip: Track suspended losses carefully and plan for opportunities to unlock their benefit, such as disposing of the activity.

• Trap #5: Wash sale rule slip-ups. Many investors know that if you sell an investment at a loss and repurchase the same or a substantially identical security within thirty days, the loss is disallowed and added to the new position’s basis. But this rule is often triggered unintentionally through dividend reinvestments or purchasing similar ETFs.
  
  Crypto currently avoids wash sale rules at the federal level, yet many investors mistakenly assume it is treated the same as stocks.
  
  Tax tip: Monitor your reinvestments and understand asset-specific rules before harvesting losses.

• Trap #6: Compressed tax brackets for trusts & estates. Trusts and estates reach the highest federal tax brackets much faster than individual brackets. Income that would be taxed moderately on a personal return can be taxed at top rates once held inside a trust, especially if it is not distributed. This makes accumulation strategies far less efficient than many expect for certain types of trusts.
  
  Tax tip: Consider distributing income to beneficiaries when appropriate, as they may be taxed at lower individual rates.