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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60 Responses

  1. Default Gravatar
    MarkAugust 2, 2018

    I just closed on my condo for 491k. I bought it 20 years ago for 129k and have done a few refinances etc! I am netting 300k after realestate fees and loan pay off! I lived in it for 18 of those years however the past two i have rented it! How can i best avoid paying capital gains! I want to buy a home in the 700s!

    • finder Customer Care
      JoshuaAugust 11, 2018Staff

      Hi Mark,

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

      If you have made a profit from the selling of your condo, it is most likely that you need to pay Capital Gains Tax (CGT). If the property was your primary residence, you could have effectively lowered your capital gains tax. However, you mentioned that you have rented that place making it an investment property. Though you can still lower your CGT since you have owned the property for more than a year, you can still lower it down further if you stop renting your property and turn it into your primary residence. If you live more than two years in that property, then you can enjoy a lower CGT.

      Please seek the help of a tax professional if you want to know more how you can pay a lower tax.

      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
    HelpJuly 30, 2018

    I lost my job of 6 years and was wondering if there anything that can help me avoid my capital gain it’s not my primary residence I bought 5and half years ago and moved out when I bought my new house 4 years ago mom moved in it never reported it as a rental or any depreciation I simply have her living free

    I would have a gain of 110k ND looks like I would owe like 20 to 30 k with state in federal in taxses I’m in California state

    • finder Customer Care
      JoshuaAugust 7, 2018Staff

      Hello there,

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

      To lower down your capital gain tax, you would need to turn your property into your primary residence. You should have lived in there for at least 2 years. However, if you own the property for at least a year, whether you live in it or not, you still have significantly lowered your CGT.

      As you can read on this page, you should wait at least five years after you’ve bought a property to sell it. You can also plan to sell a property after you’ve experienced capital losses.

      These are just some of the specific things you can do to lower your CGT.

      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
    LisaJuly 30, 2018

    I currently own a rental property (within the U.S.) which consists of 3-units. I currently reside in one of the units which makes up for 1/3 of the home and serves as my primary residence. I’m seriously thinking about selling; however, I’m adamant about paying the capital gains tax. I’m also considering adding on an addition to my daughter’s home and using the leftover funds for a condo in FL (rental and personal). Can you offer some advice as to how we can avoid paying capital gains tax?

    • finder Customer Care
      JoshuaAugust 7, 2018Staff

      Hi Lisa,

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

      Technically, even if you are living in the rental property, it is still considered as an investment property. Thankfully, if you’re selling an investment property that you owned for at least a year, you have already lowered your CGT.

      On this page, you can also refer to the “How can I reduce capital gains tax on a property?” section to learn more about lowering your CGT and how you can apply them in your situation.

      If you need more help, you may want to directly get in touch with 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​

  4. Default Gravatar
    SueJuly 28, 2018

    My husband and I are on a loan with our daughter for the house she purchased. She has lived there over 5 years. She plans to sell it and move into a house which is in our family trust . She will own it someday but it is I trusted to my husband and I at this time. We are planning on putting a modular home on the property where the intrusted home is located. We plan on using the proceeds from the home we will be selling to finance the modular. I know this is complicated . Will we be able to invest the money from the sale of her home to do this and avoid capital gains? The modular will be a home my handicapped sister will live in. Thank you so much for your time. Sue

    • finder Customer Care
      JoshuaAugust 6, 2018Staff

      Hi Sue,

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

      If you are going to sell a primary residence, meaning the owner lived there for at least 2 years, then you could significantly reduce your CGT. However, using your profit to build a modular house won’t enable you to avoid CGT.

      Please talk to a tax specialist to get a more personalized answer to your question.

      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
    DavidJuly 27, 2018

    Can I avoid capital gains tax by moving profits from a sale of real estate to a purchase of land? Also I have heard the proceeds from the sale have to be moved to a special account and there is a time limit on how long you have to transfer funds and not pay CGT. Can you explain in more detail? Thanks

    • finder Customer Care
      JoshuaAugust 6, 2018Staff

      Hi David,

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

      Moving your profit from a sale of real estate to a purchase of land won’t enable you to avoid capital gains tax. However, what you can do is trade “like-kind” properties to avoid paying taxes on the initial profit. As a general rule, as long as you made a profit out of your sale, then you need to pay CGT.

      Please talk to a tax specialist to learn more about CGT.

      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
    CathyJuly 25, 2018

    Listed on shares of Co-Op with mother who has passed away. Property to be sold to settle with my brothers. I am the Adm. of the Estate. How much is to be paid in capital gains taxes in NYC.

    • finder Customer Care
      JoshuaAugust 6, 2018Staff

      Hi Cathy,

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

      I’m afraid I can’t give you the exact capital gains taxes that you would need to pay in NYC. Moreover, there are some provisions in the tax law that allows you to get exempted from the CGT or reduce it significantly. Some of the details are mentioned on this page.

      Generally, if you made a profit from the selling of your property, then you would need to pay CGT. Please talk to a tax expert or visit your local tax office to know how much exactly you need to pay.

      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
    RaghvendraJuly 25, 2018

    I sale my commercial cum residential house on dt. 26.12.2017. this property come to my father after the death of his father and after the death of my father it come to me . I do not invest the money at any property till today , what tax can be made and how i can get total relief from capital gain?

    • finder Customer Care
      JoshuaAugust 6, 2018Staff

      Hi Raghvendra,

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

      There are a few things you need to understand when determining how much Capital Gains Tax (CGT) you need to pay. Since I’m not familiar with the complete details of your situation, it would be a good idea to talk to a tax specialist or ask your local tax office.

      Generally, as long as you made a profit from selling the property, meaning your purchase price is lower than your selling price, then you need to pay CGT.

      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
    ozzieJuly 23, 2018

    I have a capital loss carry over of $20,000 plus from previous years.I deduct $3000 each yr. on my 1040.Assuming I sell a rental house for a $8,000 capital gain,Can the ENTIRE $8000 be deducted from my carry over ,leaving a zero tax gain liability

    • finder Customer Care
      JoshuaAugust 5, 2018Staff

      Hi Ozzie,

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

      The answer to your question is it depends. Generally, since the sale of your rental house is a different transaction, you will still have to pay CGT for it if in case you made a profit. However, if it is still part of your capital loss, then it might offset your loss.

      Please speak to a tax specialist or visit your tax office. This way you get a more personalized answer to your question.

      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
    LindaJuly 22, 2018

    If I sell an investment property for $250,000 and carryback $200,000, do I pay cap gain on the $50,000 I receive or the $250,000? (Less basis of course).

    • finder Customer Care
      JoshuaAugust 5, 2018Staff

      Hi Linda,

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

      Generally, you get taxed on your net income or profit. This means that whatever you earn, there would be a tax deducted from it. In your example, you will be taxed on the $50,000.

      Please note that this answer should not replace the professional advice of a tax specialist. To learn more information, you may visit your local tax office.

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

      Have a wonderful day!

      Cheers,
      Joshua

  10. Default Gravatar
    JamieJuly 18, 2018

    I am refinancing my primary residence an Investment property for 1 year. After that year I plan on selling it for a profit. At that time will can i still avoid paying capital gains?

    • finder Customer Care
      nikkiangcoJuly 22, 2018Staff

      Hi Jamie!

      Thanks for leaving a message on our page.

      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. If you plan to rent out the property, keep your rental stint under three years: After three years, your home becomes an investment property.

      Hope this helps!

      Nikki

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