Selling your home can be a lucrative transaction and careful financial planning is an important part to getting the most for your investment. Sellers can end up owing considerable capital gains taxes, but under the right circumstances a homeowner can sidestep them and reap the benefits of avoiding these taxes completely.
There are a few ways to avoid paying capital gains taxes. The first way to avoid these taxes is to purchase a home that you can live in. If a buyer purchases a home for resale and doesn’t live in it, they will be required to pay capital gains taxes.
Not only do you need to live in a home you have purchased, you must live in the house for at least two out of the last five years. The two years don’t have to be consecutive, but while you are living in the home it must be your primary residence. As long as it is your primary residence during the time that you live there you can (for example) live in your home one year, move out for two and move back in for one to qualify as exempt.
Only one home can be sold capital gains tax-free within a two year period. Sellers can sell multiple homes during that time, but only one will be exempt. If you have two properties that have been primary residences for two out of the last five years and you would like to sell them both tax-free you could consider selling one and holding onto the second one for an additional two years.
Lastly, you need to look at what you will make on the sale of your home. For singles, the first $250,000 of profit is tax-free. For couples the first $500,000 is tax-free. The base price from which profit is calculated is not limited to the price you purchased the home for. Expenses such as closing costs and home improvements can be subtracted from the profit.
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