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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.

Live in the property for at least 2 years.

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.

Note that this does not mean you have to own the property for a minimum of 5 years however. Once you’ve lived in the property for at least 2 years, you’d reach capital gains tax exemption.

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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247 Responses

  1. Default Gravatar
    WendiJune 11, 2019

    HI! I am looking into selling my house. Is the original purchase price the initial price or the last refinance price?

    • Avatarfinder Customer Care
      JhezJune 12, 2019Staff

      Hi Wendi,

      Thank you for your comment.

      If you have made some renovations on the property, then the selling price will be higher than the original price that you’ve bought it. You may need to go through the appraisal process if you need help in determining the value of your property. The appraiser compares several of your property’s features against the comparables’ features to arrive at the value. Factors include square footage, appearance, amenities, and condition.

      Regarding the Capital Gain Tax, if you sell a house for more than you bought it for, you may need to pay capital gains tax on the difference. This tax is levied on the profit from the sale of property.

      Regards,
      Jhezelyn

  2. Default Gravatar
    MarcJune 6, 2019

    My client wants to sell his home. His wife just passed away in February 2019. Can he still get the $500K exemption? They lived in the home for 25 years.

    • Avatarfinder Customer Care
      JoshuaJune 6, 2019Staff

      Hi Marc,

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

      There’s still a good chance that your client might get the $500 tax exemption. Generally speaking, if your client sells the house within two years of their spouse’s death and as long as they owned and lived in the house for two of the five years before the spouse died, then there’s a good chance that the $500 exemption would still take effect.

      Please note that we are not a tax specialist. You would still need to confirm with the ATO and obtain a more personalised answer as there are other factors that might affect the situation of your client.

      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
    EllenMay 28, 2019

    I have a small apartment in the basement of my primary residence.
    Can I rent it for part of the year, while still living upstairs without effecting the $250,000. long term capital gains exemption when I sell?

    • Avatarfinder Customer Care
      BellaMay 29, 2019Staff

      Hi Ellen,

      Thanks for your inquiry.

      As long as you meet the criteria written above, then you are eligible to a CGT exemption. Nevertheless, 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. It’s also best to speak to a tax professional to understand your options based on your specific situation.

      I hope this helps.

      Kind regards,
      Bella

  4. Default Gravatar
    FrenchvMay 21, 2019

    If you inherit a home between 4 siblings and the house value is $800.000 how can you avoid capital gains tax if this is the first house you ever owned

    • Avatarfinder Customer Care
      BellaMay 23, 2019Staff

      Hi Frenchv,

      Thanks for your inquiry.

      Since CGT is a bit tricky and complicated, you will need to contact a tax lawyer. They will be able to tell you how it works when it is part of an inheritance.

      I hope this helps.

      Kind regards,
      Bella

  5. Default Gravatar
    CharlesMay 7, 2019

    I recently sold my house. I put $200,000 of inherited funds into the original purchase. Do the inherited funds have to be reinvested into my new home?

    • Avatarfinder Customer Care
      MaiMay 7, 2019Staff

      Hi Charles,

      Thank you for reaching out.

      Yes, if you want to avoid capital gains tax then you need to reinvest to a new home. But you can use the proceeds from the sale on whatever you want – if it’s not a new primary residence, you will have to pay capital gains tax unfortunately.

      Hope this helps! 😊

      Kind Regards,
      Mai

  6. Default Gravatar
    KeithMay 2, 2019

    My wife and I will be inheriting her father’s house once he passes. The mortgage is paid off and the deed was transferred into my wife’s name already to avoid will issues.

    The game plan is to sell the house, is there a way to reinvest that money so we don’t have to pay the taxes on it? Dump it into our current mortgage? Retirement funds?

    • Avatarfinder Customer Care
      MaiMay 3, 2019Staff

      Hi Keith,

      Thank you for reaching out to Finder.

      When you sell the house, it means that you have gained revenue and you are liable to pay CGT. The article above though have some tips on how you can at least lower it down. But as gentle reminder, you have reached Finder and we are a general information and comparison website. I highly suggest to please seek professional advice from a tax agent on this matter so you can be guided properly.

      Have a good day!

      Kind Regards,
      Mai

  7. Default Gravatar
    RichMay 2, 2019

    I sold a home approximately 5 months ago and made a profit. We did not have an intention of buying another property for reinvestment at the time so we took the gain and paid Off a mortgage on another home and we paid CGT on this year taxes. We have now come across a cabin that we would like to purchase. If we do make this purchase on a 2nd home is there any way for us to retroactively qualify the investment under the 1031? We would be paying for the home through a refinance of the same home we paid off.

    • Avatarfinder Customer Care
      MaiMay 4, 2019Staff

      Hi Rich,

      Thank you for reaching out.

      In some cases you can retroactively file for 1031 Exchange 180 days from the date of sale. But you may want to reach out to IRS to check if your situation is eligible to qualify for retroactive filing of investment.

      You can also contact tax experts to assist you on this too as an alternative.

      Hope this helps! 😊

      Kind Regards,
      Mai

  8. Default Gravatar
    MichelleMay 1, 2019

    If I sell my home and only use part of the capital gain to purchase another primary residence how long do I have to use the remaining cash to purchase another income property and who holds the funds while I search for another property escrow or myself?

    • Avatarfinder Customer Care
      JeniMay 1, 2019Staff

      Hi Michelle,

      Thank you for getting in touch with Finder.

      So long that you follow the IRS rules on timelines, you may nominate a third-party to hold the money between when you sell your property and you buy the replacement so the IRS will not treat the transaction as a taxable sale. However, when you eventually cash out, you will have to pay all of your capital gains and recapture taxes in one large lump sum. I still suggest that you speak with a tax agent on this matter for further clarification.

      I hope this helps.

      Thank you and have a wonderful day!

      Cheers,
      Jeni

  9. Default Gravatar
    ValerieApril 27, 2019

    I have a commercial rental property worth a lot more than I paid for it. If I sold it for current market value but took back a mortgage, would I still be liable for the capital gains in Florida?

    • Avatarfinder Customer Care
      JeniApril 28, 2019Staff

      Hi Valerie,

      Thank you for getting in touch with Finder.

      Please note that as long as the property gained revenue then you’re liable for the CGT. As a friendly reminder, you have reached Finder – a general information and comparison website. We can offer you general advice. Please seek professional advice from a tax agent on this matter.

      I hope this helps.

      Thank you and have a wonderful day!

      Cheers,
      Jeni

  10. Default Gravatar
    KimApril 25, 2019

    My mother in law is selling her primary residence of 50 years owned free and clear. Will she have to pay capital gains?

    • Avatarfinder Customer Care
      nikkiangcoApril 26, 2019Staff

      Hi Kim,

      Thanks for getting in touch with Finder! 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. The criteria for CGT exemption are the ff:

      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.

      To get a more closed detailed computation for a CGT exemption, we suggest seeking assistance from a tax advisor.

      Hope this helps!

      Best,
      Nikki

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