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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108 Responses

  1. Default Gravatar
    mariaNovember 13, 2018

    I purchased a home in 1993 paid $32,000 cash deal lived in the home for about 2 years and its been rented ever since. My tenant that has been living there for the past 8 years wants to purchase the home $165.00. How can I avoid capital gains?

    • finder Customer Care
      JoshuaNovember 26, 2018Staff

      Hi Maria,

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

      Based on the information you provided, it is most likely that you won’t be able to avoid capital gains since you are not selling a primary residence. Since this is the case, it would rather be helpful to know how you can decrease your CGT and you can learn more about this by reading the tips mentioned under the subheading “How can I reduce capital gains tax on a property?”

      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
    SuzeNovember 11, 2018

    I have a three family property that I have had a little over two years. I lived in one of the apartments for 2 years. I want to put it up for sale in the spring and would like to use all of the profits towards a new single-family primary residence. Would I still have to pay CG or if I’m able to delay this how long can I delay it for?

    • finder Customer Care
      JoshuaNovember 26, 2018Staff

      Hi Suze,

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

      In most cases, you will only be exempted from CGT if you are selling a primary residence and then purchase your new primary residence within a specified window of time. For a specific list of the conditions you would be exempted, please refer to the information written below the subheading, “Is my primary residence exempt from capital gains tax?”

      You need to file CGT within the fiscal year when you made the income.

      I am not sure if the other 2 residences of the three-family residence are exempted or not from CGT, and it could very well be that they are not, so it is important to consult a tax professional who can answer this definitively.

      Please be sure to speak to a tax specialist or visit your local tax office 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
    MonicaOctober 19, 2018

    We’ve lived in our primary residence for 32 years and are thinking of renting it. If we later sell this house and it’s not valued for more than 500,000, do we have to pay capital gains? If not and it’s considered investment property, how do we figure the capital gains

    • finder Customer Care
      JoshuaOctober 20, 2018Staff

      Hi Monica,

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

      Once you rent out your property, it will technically become an investment property after three years. Since you own your property for more than three decades, even if it is an investment property, you have effectively reduced your tax already.

      Now, there are different ways for you to reduce your CGT and you can learn more about them by reading the information above.

      To get a general idea of how much CGT you will be paying, simply subtract cost basis from selling price. Of course, this is just an estimate. You would still need to speak to tax specialist or visit a tax office near you to get 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

  4. Default Gravatar
    SAMOctober 19, 2018

    I have residential property in foreign country INDIA and it is rented not for self use. I want to sell this and buy one in the US IL where I am currently residing. How do I calculate my capital gain for paying taxes in the US.

    A foreign owned property is sold and there is a long term capital gain, can the tax in USA ONTHIS be avoided by purchasing another property in USA ?

    • finder Customer Care
      JoshuaOctober 20, 2018Staff

      Hi Sam,

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

      Generally, you would be paying tax in India since that’s where the property is located. In the US, when you buy a property, you won’t pay tax for the time you didn’t own the property. You will only start paying for it when you have actually owned the property.

      Regarding your second question, you would need to check with the tax office of India. From there, you should know the tax implications of your property. Moreover, if you are worried about your tax here in the US, you would want to speak to a tax specialist as well.

      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
    RobertOctober 18, 2018

    We are selling a 30 acre plot of land that includes a house trailer & a barn, it was a primary residence for my wife for the 1st 10-12 years & for the last 20 years has been vacant or rented at a nominal rate ($100.00/month). Initial cost in 1986 was $28K plus $20K for trailer & $15K for barn & road. We will be selling for $112.5K…how much capital gains tax can we expect to pay (if any). I am 61, my wife is 63 & we are both retired with less than $30K/year income.

    • finder Customer Care
      JoshuaOctober 20, 2018Staff

      Hi Robert,

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

      In most cases, you can avoid CGT if you are selling a primary residence where you have lived for at least the last 2 years. The usual way of determining your CGT is subtracting your cost basis from your selling price. Of course, this is a simplistic way of calculating. There are other factors that might affect your CGT. For this reason, it would be a good idea to directly get in touch with your tax office or 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

  6. Default Gravatar
    BozOctober 15, 2018

    What if you had a second home for 8 years, rented it for 4 then turned it back into a second home. If we are looking to sell oils we keep the home as a second home for 2 years and reduce our tax liability? Or are second home property sales never able to reduce tax liability when sold?

    • finder Customer Care
      JoshuaOctober 20, 2018Staff

      Hi Boz Mom,

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

      Generally, the best way for you to avoid capital gains tax is to turn the property into your primary residence for at least two years. Now, if that is not possible, you can still reduce your tax. When selling your second home, you can reduce tax by doing one of the methods mentioned under the subheading “How can I reduce capital gains tax on a property?” found above this page.

      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
    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

  8. 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

  9. 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

  10. 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

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