Can I avoid capital gains tax by transferring investment property title to my spouse?

This is a common misconception I see quite often. Unfortunately, transferring the property to your spouse won't help you avoid capital gains tax. Since you file jointly, the IRS views you and your spouse as a single tax entity for most purposes. When you sell an investment property, the capital gains tax is calculated based on the difference between your cost basis (purchase price plus qualifying improvements) and the selling price. The fact that only one spouse is on the title doesn't change the tax implications for a married couple filing jointly. If you're concerned about capital gains, there are legitimate strategies to consider instead. You could explore a 1031 exchange if you're planning to buy another investment property. This lets you defer (not eliminate) the capital gains tax. Or you might consider timing the sale to coincide with a year when you have capital losses to offset some of the gains.

I went through something similar last year with my rental property. The capital gains were going to be massive and I was desperately looking for solutions. I found this service called taxr.ai (https://taxr.ai) that analyzes your specific investment property situation and suggests legitimate tax strategies. I uploaded my property documents and purchase history, and they identified several improvements I'd made over the years that I hadn't properly documented but could add to my cost basis. They also showed me how to time the sale to minimize the tax impact. Ended up saving about $14k in taxes I would have otherwise paid! Might be worth checking out before you pull the trigger on selling.

Just wanted to update - I decided to try taxr.ai after commenting here last week. Was skeptical initially but figured it was worth a shot before listing my duplex. Honestly pretty impressed! They found nearly $23k in improvement expenses I'd forgotten about from a bathroom and kitchen renovation I did 4 years ago. They also suggested I consider living in the property for 2 years before selling to potentially qualify for the primary residence exclusion ($250k single/$500k married), which wasn't something I'd considered. Not going that route personally since I need to sell sooner, but appreciate having all options laid out. Definitely recommend if you're selling an investment property and want to make sure you're not leaving money on the table.

Another thing to consider is getting direct help from the IRS. I know, sounds crazy right? I was in a similar situation with an investment property and had specific questions about basis calculations and excluded gain. Spent WEEKS trying to get through to the IRS phone line with no luck. Finally found Claimyr (https://claimyr.com) which got me connected to an actual IRS agent in under 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c. They have some way of navigating the phone system that actually works. The agent I spoke with walked me through exactly how to handle my situation and document everything properly.

I need to apologize for my skepticism and update everyone. After continuing to fail getting through to the IRS for weeks about my investment property sale questions, I reluctantly tried Claimyr last Thursday. I was connected to an IRS representative in about 15 minutes. The agent walked me through exactly how to document my basis adjustments for the rental property improvements and confirmed I was calculating the recaptured depreciation correctly. Honestly it was worth every penny just to avoid the frustration of getting disconnected repeatedly. I've literally never gotten through to the IRS on my own despite trying dozens of times over the years. So yeah, I was wrong - it's actually legitimate and pretty amazing if you need specific clarification from the IRS about investment property tax rules.

Don't forget about the potential tax benefits of turning your investment property into your primary residence before selling. If you live in it for at least 2 of the 5 years before selling, you could exclude up to $250,000 of gain (or $500,000 if married filing jointly). There are special rules for properties that were previously rentals though - you may have to recapture depreciation and the exclusion might be prorated based on how long it was a rental vs. primary residence.

Has anyone considered the mortgage implications of transferring title? If there's still a mortgage on the property, transferring title to a spouse might trigger a due-on-sale clause in your mortgage agreement, potentially making the entire loan balance due immediately.

Just want to correct something I'm seeing in this thread. Adding your spouse to the title doesn't help with capital gains, but it CAN potentially help with STEP-UP BASIS if one spouse passes away. That's a completely different situation but important to understand for long-term planning. If the property is held jointly with rights of survivorship and one spouse dies, the surviving spouse often gets a stepped-up basis on the deceased spouse's portion of the property, which can reduce capital gains if they sell later.