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.

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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225 Responses

  1. Default Gravatar
    DebbieApril 10, 2019

    I am selling my mom’s house in New Jersey. Although the house was in mine and my brother’s name, my mom was the only resident. We both live in Florida. How do I calculate capital gains after the sale.

    • finder Customer Care
      nikkiangcoApril 10, 2019Staff

      Hi Debbie,

      Thanks for reaching out to Finder! To find out an estimate of what your CGT will be, read up on the part of the page that says “How much will I have to pay?” To get a more closed detailed computation fo your CGT, we suggest seeking assistance from a tax advisor.

      Hope this was helpful. Don’t hesitate to message us back if you have more questions.

      Best,
      Nikki

  2. Default Gravatar
    TheApril 3, 2019

    We are both retired and selling our only home. We plan to rent or move in with our children.
    The income from our home sale will just be our savings.
    Will we pay capital gains, if we don’t buy another home?
    Thanking you in advance,
    The retirees

    • finder Customer Care
      JoshuaApril 4, 2019Staff

      Hi The retirees,

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

      Yes, it is possible for you to get exempted from the CGT provided that you meet the eligibility requirements. You can read these requirements above, under the subheading, “Is my primary residence exempt from capital gains 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

  3. Default Gravatar
    SteveApril 1, 2019

    I have a rental I am selling to pay off student loans. Say I sell for $120K profit and pay off $95K in loans. Can I roll the $25K difference into a new rental and not pay CGT?

    • finder Customer Care
      johnbasanesApril 2, 2019Staff

      Hi Steve,

      Thank you for reaching out to Finder.

      We may need a tax expert to provide a recommendation on this, it is a little tricky and complicated. As well, it would be a bit difficult to get you an answer as there may be other factors that needs to be looked into. For this reason, it’s best you speak to someone who will have a better picture of your circumstances and finances as well as provide you the options available for you. A tax specialist could also be sought after since they know how tax law works and they have the experience to help you. Hope this helps!

      Cheers,
      Reggie

  4. Default Gravatar
    GinnyMarch 29, 2019

    My husband and I live in Indiana and bought an investment vacation cabin in TN 5 years ago. The cabin was for our use and no income was generated from it. We are selling it now and all the furniture and appliances (dishes, linens, etc.) are being sold with it and were included in the selling price. It was pushed as a fully furnished vacation home in the mountains. Can the furniture and appliances be used to reduce capital gains?

    • finder Customer Care
      JoshuaApril 1, 2019Staff

      Hi Ginny,

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

      The furniture and appliances that you sell together with your property can be considered as part of the home improvement. For this reason, you could substract this expense in your capital gains.

      Since tax law can be very complicated and I’m not complicated familiar with your situation, I highly recommend you discuss your concern 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

  5. Default Gravatar
    CATMarch 12, 2019

    Can I buy a property then sell my house, that has capital gains rolled into it, and put the money from the sale into the house bought?

    • finder Customer Care
      JeniMarch 13, 2019Staff

      Hi Cat,

      Thank you for getting in touch with Finder.

      You may do so. When you sell a personal residence and buy another one, the IRS will not let you do a 1031 exchange. Please note that when you sell your property, you create a taxable event and if you earned a profit, you will be liable for capital gains taxes. I suggest that you seek help from a tax agent on this matter for a more accurate info on buying and selling your property.

      I hope this helps.

      Thank you and have a wonderful day!

      Cheers,
      Jeni

  6. Default Gravatar
    AlanMarch 11, 2019

    I purchased a home from my mother in Aug 2009 for $300,000. Borrowed $140,000, paid her $30,000. and she deferred the remaining balance of $130,000 until my home sold which it did in April 2010. I endorsed the check from the Title company for $130, 038.58 and gave it to her the day of closing .

    My question: The attorney listed on the closing documents not that it was borrowed but as a “Gift of Equity” of $130,000.

    I am selling the house after living in it for 10years. Will I owe CGT on the sell of the home if it sells for $450,000-$475,000.

    • finder Customer Care
      johnbasanesMarch 12, 2019Staff

      Hi Alan,

      Thank you for reaching out to Finder.

      Basing it from the scenario you provided, yes there is CGT that needs to be paid since CGT is computed from the selling price versus the original purchase price. You may need a tax expert to provide you with specifics on how much you would be paying to be sure on the computation. Hope this helps!

      Cheers,
      Reggie

  7. Default Gravatar
    CarissaMarch 8, 2019

    The poultry houses and house are on the same property. It appraised for $1,065,000.00 and we sell it for $850.000.00. We are buying another house with no business. Are we exempt from paying capital gain taxes if I sell for less than it cost me?

    • finder Customer Care
      JoshuaMarch 10, 2019Staff

      Hi Carissa,

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

      Capital gains tax applies when you made a profit from your sale. The appraisal value of your property does not affect your CGT but rather it is your selling price. You can either accept that appraisal value as your selling price or not.

      Now, if your cost basis is greater than your selling price, then it is most probably that you won’t be paying any CGT.

      Tax laws can be complicated and it is highly recommended that you speak to a tax specialist. By doing so, you get a more concrete and specific answer to how much CGT you are going to pay once the sale pushed through.

      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
    ChelsMarch 8, 2019

    I have a home that is paid off and in my name and my sister’s name. We purchased it for my mother to live in after my father passed away with life insurance money that was left to us. We have never collected rent from my mother and she has had it as a primary residence. My sister has lived in the home but no longer wants the home attached to her name. I have only lived there off and on a few times over the years. We would like to transfer ownership to my mom and allow her to sell it and buy a smaller property that she can take care of on her own as she is getting older. If we quitclaimed the deed to her, could she avoid the capital gains since she has lived there for almost a decade even though she would only recently been added to the deed? This home has never carried a mortgage and again has never been rented out.

    • finder Customer Care
      JoshuaMarch 10, 2019Staff

      Hi Chels,

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

      The tax exemption generally applies for owners of property for sale. In this case, since you didn’t live in your home and has not made it your primary residence, there’s a bigger than that you won’t be exempted. In case you quitclaim the property to your mother, she would still need to wait up to 2 years to turn the property into her primary residence.

      However, since you have owned the property for years, then you should be able to reduce your tax if ever you decide to push through the sale.

      Please note that we are not tax experts and so you would still need to make your independent research. Tax laws can be very complicated. Best is to sit down with a tax specialist to obtain a more personalized answer.

      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
    MarlaMarch 7, 2019

    I bought a single home in 2003 for $278,000 it was my primary residence for 12 years, I place for sale in 2014 for $480,000 did not sell I had made the mistake of putting a downpayment on a new house before selling this one the market was really bad in 2014 ended up with 2 properties got someone to rent to own but unfortunately they split and did not buy the place, I want to sell it now for $460,000; do I have to pay a lot of capital gain, our family income is about $120,000?

    • finder Customer Care
      johnbasanesMarch 8, 2019Staff

      Hi Marla,

      Thank you for reaching out to Finder.

      Thank you for reaching out to Finder.

      We may need a tax expert to provide a recommendation on this, it is a little tricky and complicated. As well, it would be a bit difficult to get you an answer as there may be other factors that needs to be looked into. For this reason, it’s best you speak to someone who will have a better picture of your circumstances and finances as well as provide you the options available for you. A tax specialist could also be sought after since they know how tax law works and they have the experience to help you. Hope this helps!

      Cheers,
      Reggie

  10. Default Gravatar
    RicoMarch 7, 2019

    I found conflicting information on-line and would like clarification.
    I purchase a home for $120,000 in 2000. I refinanced the home in 2008 for $200,000.
    I rented the home from 2011 to April 2018 and I sold the home on August 2018 for $230,000.
    Filling my taxes, am I supposed to use the $200,000 refinancing price as my purchase price for capital gains which would be $30,000 or the initial price of $120,000 and my capital gains would be $110,000?
    Thank you,

    • finder Customer Care
      johnbasanesMarch 8, 2019Staff

      Hi Rico,

      Thank you for reaching out to Finder.

      Generally, you would need to use the original purchase price which is $120,000 when calculating your capital gains tax. For more information regarding this, you may approach a tax specialist for assistance. Hope this helps!

      Cheers,
      Reggie

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