How to avoid capital gains tax when selling property | finder.com
How to avoid capital gains tax when selling property

How to avoid capital gains tax when selling property

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Tips to minimize — or eliminate — your capital gains tax.

Selling your home is exhausting and expensive enough without the stress of surprise taxes and fees.

When putting your house on the market, taxes are inevitable. But there are few strategies that can help you hold on to more of your money.

As home prices continue to surge, here’s how to minimize how much you pay on your profits — also called a capital gains tax.

What is a capital gains tax?

A capital gains tax is a fee that you pay to the government when you sell your home, or something else of value, for more than you paid for it. For example, if you bought a house years ago at $200,000 and sold it for $300,000, you’d pay a percentage of your $100,000 profit — or capital gains — to the government.

When you make money from selling a house or property, your capital gains tax depends on whether you lived in the house and how long you lived there.

Short-term capital gains

In general, you’ll pay higher taxes on property you’ve owned for less than a year. This is because short-term capital gains are taxed at the same rate as ordinary income. In 2017, that rate is between 10% and 39.6% of your profit, but most people pay around 25%.

Long-term capital gains

With long-term capital gains, you get the benefit of a reduced tax rate that typically doesn’t exceed 20%. If you’re selling a residence or investment property you’ve held on to for at least a year, you’ve effectively lowered your capital gains tax.

Does the capital gains tax apply only to real estate?

No. The IRS can take capital gains tax on anything you sell that makes a profit, including car and other investments, like stocks and bonds. (Most retirement accounts, however, allow you to defer paying taxes on gains until you’re eligible to withdraw money.)

If the price has gone up since you purchased an asset and you plan to sell it, you’ll typically pay capital gains tax on the profit.

Is my primary residence exempt from capital gains tax?

Yes. The IRS allows you skim up to $250,000 off the profit of a primary residence when calculating capital gains tax. That amount jumps to $500,000, if you’re married.

You can typically take advantage of this exemption if you meet three requirements:

  • You’ve owned your home for at least two years in the five years before you’ve looked to sell it.
  • Your home was your primary residence for at least two years of that same five-year period.
  • You haven’t taken a capital gains exclusion for any other property sold at least two years before this current sale.

Staying in your home longer than two years might help you qualify for an exemption. Even if it takes three years to sell it after you move, you could still avoid capital gains tax if you lived in the home for at least two years.

How much will I have to pay?

Most taxpayers miscalculate their capital gains by simply subtracting the purchase price from the selling price. But under the tax code, “purchase price” and “selling price” are much more.

Your purchase price — or “cost basis” — is what you paid for the house or property plus all the taxes and fees you paid when you bought it, typically from 2% to 5% of the cost. You can also include money spent on projects that added value to the property, like that extra bathroom or garage improvements.

On the other end of your investment, your selling price is what you sell your property for minus any commission or closing fees you pay to sell it.

Let’s say that years ago you paid $200,000 for a house. At that time, you paid $8,000 in taxes and closing fees. Since then, you’ve made $30,000 in improvements. In this case, your cost basis is $238,000.

Original purchase pricePLUS taxes and fees at time of purchasePLUS added valueEQUALS cost basis
$200,000$8,000$30,000$238,000

You’ve now sold this home for $450,000. To calculate your taxable profit, you’d subtract your cost basis from the price you sold it for.

Selling priceLESS cost basisEQUALS taxable profit
$450,000$238,000$212,000

Your taxable profit on your recent sale is $212,000. And because you bought the home more than two years ago, you can walk away with your $212,000 tax-free.

How can I reduce capital gains tax on a property?

If your property isn’t exempt from the capital gains tax, here are a few strategies to minimize or reduce it.

Wait at least five years after you’ve bought a property to sell it.

To get around the capital gains tax, you need to live in your primary residence at least two of the five years before you sell it.

Say that you’ve lived in your home for 2.5 years and are now ready to move closer to your job. By renting out the property for another 2.5 years, you’d reach capital gains tax exemption. But be sure to keep your rental stint under three years: After three years, your home becomes an investment property.

Plan to sell a property after you’ve experienced capital losses.

If you’re going through a period in which you’re producing less income than usual, it could be a good time to sell a property. Because your tax rate factors in your income, you can take advantage of a reduced rate.

Let’s say that your spouse leaves her job to pursue studies. Prior to her resignation, your two-income household put you in a higher tax bracket that could mean a capital gains rate of 15%. With your drop in income, you’re now in a lower tax bracket — which means fewer taxes on any home sale during this period.

Track your home improvements or selling expenses.

Don’t miss out on claiming all value you added to your house while living there. Keep track of how much you spend on improvements and upgrades to your property, and reflect that amount in your ultimate cost basis. You’ll need records and receipts when submitting your taxes.

Turn your primary residence into a rental.

Renting your property can be a solid way to cover your mortgage while you live elsewhere. But to be exempt from the capital gains tax, you’ll need to limit how long you rent it. After three years, it’s considered an investment property.

Are there specific exemptions for investment property?

Yes. Investors can look to Tax Code Section 1031 to profit on business or investment properties without paying capital gains tax.

Section 1031 allows you to trade “like-kind” properties to avoid paying taxes on the initial profit. These like-kind properties must be similar: You can trade a retail space for another retail space, but you can’t trade a retail space for a rental property.

If the value of one property is greater than the other, you can add cash to the deal. The person who owns the property of lesser value can pay any difference at the time of sale.

Can I avoid the tax by moving into my investment property?

Yes. If you live in your property for at least two years, it changes the nature of your property from an investment property back to your primary residence. You’re then eligible for the capital gains tax exemption of up to $250,000 (or $500,000 if you’re married).

Say you live in New York City with your spouse. You decide to sell your place in the city, where you’ve lived for the past two years, and move into your vacation home upstate. Since your city apartment was your primary residence, you take your $500,000 profit tax-free.

Your move upstate doesn’t have to be permanent. If you want to ultimately move back to the city, stay in your vacation home at least two years. After two years, that property becomes your primary residence, and you can sell it and pocket another tax-free profit of up $500,000.

Bottom line

Homeownership often comes with the headache of ultimately selling your home. By knowing more about the intricacies of the capital gains tax, you could line up your sale to maximize the profits you make on your home or investment property. And save a big headache at tax time.

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96 Responses

  1. Default Gravatar
    JamesOctober 13, 2018

    I owned a home in NV for over 39 years as I live and work overseas. I rent it to my daughter and I stay ther whenever I am in the states. It is listed as my address on my Fed tax return and on my driver license. Do I meet the test to avoid capital gains?

    • finder Customer Care
      JoshuaOctober 14, 2018Staff

      Hi James,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      Based on the details you gave, you will most likely pay CGT when you sell your home. The most common way to avoid CGT is to turn it into your primary residence for at least two years. If this isn’t possible, then you will pay CGT.

      You may also want to check with a tax specialist to know exactly how much CGT you will be paying.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

  2. Default Gravatar
    NeilOctober 13, 2018

    I have a small BTL property portfolio. I sold one of the properties in February 2017 with a profit of £42000. I used £20000 to pay of part of the mortgage on another BTL property. Do I pay CGT on £42000 or £22000?

    • finder Customer Care
      JoshuaOctober 14, 2018Staff

      Hi Neil,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      Generally, you can get an idea how much CGT you will be paying by subtracting your cost basis or purchase price (what you paid for the property plus all the taxes and fees you paid when you bought it) from your selling price. If you earned a profit, then you would most likely have to pay CGT on your earning.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

  3. Default Gravatar
    ShawnOctober 12, 2018

    Hello, My wife owns a condo in NYC since 2000 we lived there until 2012 and then we moved to FL. We use the place when we visit NYC and is not using it for any investment reasons. We are now ready to sell, what can we expect as far as capital gains taxes?

    • finder Customer Care
      JoshuaOctober 14, 2018Staff

      Hi Shawn,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      You could avoid CGT if you turn your condo in NYC as your primary residence for at least two years. If this isn’t possible, then you would need to pay CGT. Generally, to get an idea of how much you would be paying as a CGT, you simply subtract your cost basis from your selling price. If you earned a profit, then you CGT would incur.

      To know how to lower your CGT, please read our guide above. It would also be helpful to speak to a tax specialist to learn more.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

  4. Default Gravatar
    AlbertOctober 11, 2018

    I transfered my property to my daughter in 2009 and she tranfered it to my son in 2016 my son is a student now we have to sell it does he have to pay uncle sam if he has no income
    He will get the money for property under his name but property is mine for all practical purposes
    Any idea to avoid paying capital gain on the property

    • finder Customer Care
      JoshuaOctober 14, 2018Staff

      Hi Albert,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      Your son would need to pay CGT if in case he earned a profit from the selling of your property. However, if it has served as a primary residence for 2 years, you would be able to avoid CGT. Now, if you want to minimize CGT, you can learn more about that by reading our guide above.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

  5. Default Gravatar
    MarcusOctober 10, 2018

    I purchased my home May 2017.
    I am a veterinarian and am taking a new job well over 200 miles from my current home.
    Although less than 2 years have elapsed…actually 1 year and 5 months.. am I excluded from capital gains tax? I will be purchasing another home at the new location.
    Also..my current mortgage is a VA guaranteed mortgage.
    Thank you, Marcus

    • finder Customer Care
      JoshuaOctober 14, 2018Staff

      Hi Marcus,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      Your home should be your primary residence for at least 2 years. Since you don’t meet this requirement, it is more likely you would need to pay Capital Gains Tax. If you can’t wait for 2 years, then the next thing you may want to consider is to know how to lower your CGT. You can learn more about this by reading our guide above.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

  6. Default Gravatar
    BOctober 9, 2018

    My buyer suggests for me to save capital gains if I let him pay me over 4 years and I only claim each year what he paid.
    After 4 years have I actually saved any capital gains? Or have I just delayed the inevitable? Thank you

    • finder Customer Care
      JoshuaOctober 13, 2018Staff

      Hi B Williams,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      It is important to properly go by the legal procedure of paying capital gains tax. The best ways to save on capital gains tax is by doing the tips mentioned on this page. Delaying your payment will not save you money, but instead, it might even put you at risk of committing tax evasion.

      Speak to a legal or tax expert to obtain a more personalized advice.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

  7. Default Gravatar
    robertoOctober 5, 2018

    i buy my condo in 2012 i have a buissness here in florida i have visa e2 i pay my taxe in usa for more of 5 years what i need to pay when i sold my condo

    • finder Customer Care
      JoshuaOctober 8, 2018Staff

      Hi Roberto,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      As long as you made a profit from the selling of your property, you would need to pay capital gains tax. There are a few things you can do to reduce your CGT though and you can find learn more of that by reading the information included under this page’s subheading, “How can I reduce capital gains tax on a property?”.

      Moreover, it would be a good idea to directly get in touch with a tax specialist who can take into consideration your unique situation.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

  8. Default Gravatar
    T.September 28, 2018

    I rent an apartment for 3 years now. Have a 20% ownership in a cottage. If I sell my 20%-do I pay capital gains?

    • finder Customer Care
      JoshuaOctober 1, 2018Staff

      Hi T. Rager,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      Generally speaking, the answer to your question is yes if you have gained an income from the transaction. You can also reduce your Capital Gains Tax (CGT) by doing any of the tips mentioned under the subheading “How can I reduce capital gains tax on a property?” found above of this page.

      Since tax law can be complicated, it would be a good idea to speak to a tax specialist.

      I hope this helps. Should you have further questions, please don’t hesitate to reach us out again.

      Have a wonderful day!

      Cheers,
      Joshua

  9. Default Gravatar
    BrookeSeptember 27, 2018

    I have owned a 2 unit for 2.75 yrs-lived in 1 side for 2.5 years. If I sell my property will I be subjected to pay capital gains on half the profit from selling?

    • finder Customer Care
      nikkiangcoOctober 1, 2018Staff

      Hi Brooke!

      Thanks for your message and for contacting finder.

      Since your property is subdivided this means there will be 2 CGT applications here. 1 primary residence and 1 investment property.

      For the primary residence, to be exempt from capital gains tax, you need to live in your primary residence at least two of the five years before you sell it even if it’s only half of the property. After 5 years, you’ll be subject to CGT.

      For the investment property, the period for the other unit to become an investment property is in its third year. Right now you’re still under the period of CGT exemption. After 3 years this will already be subject to CGT. It will not be exempt from CGT and it will be considered an investment property already.

      Hope this was helpful. Feel free to message us should you have further questions.

      Cheers,

      Nikki

  10. Default Gravatar
    LindaSeptember 25, 2018

    I own a home in one state and consider it my personal residence, but I also own a business in another state. I live in my home 5 months of the year and the other 7 months I live with my mother so that I can work my business in the other state.

    If I have owned my home for two years and sale it will I still have to pay capital gains?

    • finder Customer Care
      JoshuaSeptember 26, 2018Staff

      Hi Linda,

      Thanks for getting in touch with finder. I hope all is well with you. :)

      To get exempted, you need to turn your property into a primary residence by living there at least two years. You should live their majority of the year and in some cases, you need to provide supporting documents that prove this property is really your primary residence.

      If this is not possible, though you can’t be exempted, you can still reduce your capital gains tax. This is detailed on this page under the subheading “How can I reduce capital gains tax on a property?”. Please review that information and let me know if you have further questions.

      I hope this helps.

      Have a wonderful day!

      Cheers,
      Joshua

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