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

  1. Default Gravatar
    SusanneFebruary 12, 2019

    My two adult children and I are selling acreage which has been passed on in my family for 100 plus years. The deed is in all three names with right of survivor ship. Since we paid nothing for the property, would we owe capital gains on the full amount?

    • finder Customer Care
      JhezelynFebruary 13, 2019Staff

      Hello Susanne,

      Thank you for your comment.

      Typically when you sell a home for more than you paid for it, you have to pay capital gains tax. It can range from 0% to 20%, depending on your income. People who inherit property aren’t eligible for any capital gains tax exclusions. But if you sell the home for less than the stepped-up basis, you can deduct the loss amount up to $3,000 per year.

      I would advise you to speak to a tax accountant or contact IRS if you want professional advice on this matter.

      Regards,
      Jhezelyn

  2. Default Gravatar
    BobbiFebruary 6, 2019

    I purchased a home for my mother in 2011 and sold it in 2018. I never have gotten any rent from the property but it is not my primary residence. About 6 months before I sold her house I purchased another home for her that needed an extensive renovation. Do I have to pay capital gains on the profit from the house that I sold?

    • finder Customer Care
      JoshuaFebruary 16, 2019Staff

      Hi Bobbi,

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

      Based on the information you provided, Bobbi, you would most likely need to pay capital gains tax on the profit you made from the house you sold. Since it is not your primary residence, you won’t be qualified for tax exemption. However, from what I read, you would have essentially decreased your CGT since you have owned the property for many years.

      If you want to know exactly how much you would need to pay, please 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

  3. Default Gravatar
    MyriamFebruary 5, 2019

    I sold an investment property. This property was refinanced. In order to determine the gain for taxes, which basis price I need to use? The original price or the refinanced one? In both, I paid closing cost. Appreciate your help.

    • finder Customer Care
      JhezelynFebruary 6, 2019Staff

      Hi Myriam,

      Thank you for your comment.

      Your tax gets calculated on the difference between your cost basis and your selling price. Your cost basis isn’t just the purchase price of your investment property. The initial cost is what you actually paid at the closing, including your closing costs. So, you should add all the costs for title fees, attorney’s fees, miscellaneous fees, inspection fees and the cost of any improvements you made to the property. Hence, you should use the total cost you’ve shell out for the property as the basis price.

      You are advised to discuss this with a tax accountant to get more personalized information.

      Regards,
      Jhezelyn

  4. Default Gravatar
    PiaFebruary 5, 2019

    Capital gains tax – amount owing on a property that was purchased over 17 years ago.

    • finder Customer Care
      JeniFebruary 13, 2019Staff

      Hi Pia,

      Thank you for getting in touch with finder.

      CGT depends on the after-sale figure as well as if this property was your primary residence or not. I suggest that you seek professional help from a tax agent on this matter.

      I hope this helps.

      Thank you and have a wonderful day!

      Cheers,
      Jeni

  5. Default Gravatar
    BarbaraFebruary 1, 2019

    I sold a vacation home at a profit. How long do I have to purchase another property to avoid capital tax?

    • finder Customer Care
      JoshuaFebruary 6, 2019Staff

      Hi Barbara,

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

      I understand you want to know how you can avoid capital gains tax. Regarding your question, in most cases, you would need to pay your tax in the same tax year that you have made a profit from the selling of your property. For this reason, if you delay the payment, you might face stiff penalties.

      Please speak with 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

  6. Default Gravatar
    PamJanuary 23, 2019

    I own my home in CA free and clear, and am going to sell it and buy a home in Las Vegas. I hope to net approximately $450,0000 from the sale. I am single and meet the qualifications for the $250,000 capital gains exemption. If I use the remaining $200,000 to purchase a home in Las Vegas as my primary residence, will I have to pay capital gains tax? Or would this fall under the “like-kind exchange” provision? Thank you.

    • finder Customer Care
      JoshuaJanuary 27, 2019Staff

      Hi Pam,

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

      It is more likely that you will be paying tax on the remaining $200,000. The Tax Code Section 1031 only applies to investment properties.

      Since tax laws can be complicated, you may also speak to a tax specialist to obtain a more personalized answer and learn more about options.

      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
    MargaretJanuary 22, 2019

    We sold a house with a mortgage still on it which is 230,000.00. In 2017 we sold it for the amount of 170,00.00. So we suffered a loss. Do we pay capital gains on this?

    • finder Customer Care
      JoshuaJanuary 23, 2019Staff

      Hi Margaret,

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

      If you suffered loss and didn’t make a profit, it is most likely that you will not pay capital gains tax.

      It won’t hurt as well to directly get in touch with your tax office to obtain more information.

      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
    AmandaJanuary 21, 2019

    I have an investment property that we have never lived in it and its been rented for 2 years how much cgt do we pay?

    • finder Customer Care
      ValJanuary 25, 2019Staff

      Hi Amanda,

      Thanks for your question. Please note though that we’re not tax experts so we can only offer general advice.

      If in case, the cost of the CGT would depend on some factors. You can refer to the above article under the section “How much will I have to pay?” for sample computation.

      I’d encourage you to speak to a tax accountant or directly contact IRS if you would want a professional advice on this matter or if you want to know how much exactly you need to pay for CGT.

      Regards,
      Val

  9. Default Gravatar
    SusanJanuary 21, 2019

    My sister and I sold our vacation home owned for 30 years in 2018 and we used that money as our down payment to purchase a different vacation home with family members within the 180 day required by the IRS. When I look up the 1031 instructions on form 8824 for like-kind exchange, it states only business real property is allowed. Do I have the wrong forms?

    • finder Customer Care
      CharisseJanuary 23, 2019Staff

      Hi Susan,

      Thanks for reaching out to finder.

      You have the right form however, after the passage of the new tax legislation in December 2017, a like-kind exchange applies only to the exchange of a business or real estate investment property for another property.

      Generally, any real estate property held for the productive use in the trade or business or for investment qualifies for a like-kind exchange, except for one’s own personal residence. So unfortunately, your vacation home does not qualify as a like-kind exchange.

      You can read the full information about like-kind exchanges on this IRS page.

      I hope this helps.

      Cheers,
      Charisse

  10. Default Gravatar
    KathyJanuary 21, 2019

    My Mom died 6 years ago and my brother was living in her house. My brother had a stroke now I need to sale to take care of him. What do I need to do to not pay capital gains ?

    • finder Customer Care
      johnbasanesJanuary 22, 2019Staff

      Hi Kathy,

      Thank you for reaching out to finder.

      There are certain factors that would exempt you from paying capital gains tax:

      A $250,000 Exclusion on the Sale of a Main Home
      – Unmarried individuals can exclude up to $250,000 in profit from the sale of their main home. You can exclude $500,000 if you’re married.

      The 2-Out-Of-5-Year Rule
      – The exclusion depends on the property being your residence, not an investment property. You must have lived in the home for a minimum of two out of the last five years immediately preceding the date of the sale.

      Qualifying Lapses in Residency
      – If you’re selling your house for medical or health reasons, document these reasons with a letter from your physician.

      The Ownership Rule
      – You must also have owned the property for at least two of the last five years. You can own it at a time when you don’t live there or live there for a period of time without actually owning it. The two years of residency and the two years of ownership don’t have to be concurrent.

      I’d encourage you to speak to a tax accountant or directly contact IRS if you would want a professional advice on this matter. Hope this helps!

      Cheers,
      Reggie

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