Avoid Capital Gains Taxes When Selling a House

Picture this: you just sold your house for $100,000 more than what you bought it for. Score! You just made a ton of money! What should you do with the profits? A seller’s high rushes over you…until…

You get hit with a huge capital gains tax bill.

Let us dig deeper to gather more information on these taxes and how you as a homeowner can avoid capital gains taxes when selling your house.

What Are Capital Gains Taxes?

A capital gains tax is a tax on the growth in value of investments incurred when individuals and corporations sell those investments. The U.S. capital gains tax only applies to profits from the sale of assets, aka homes, held for more than a year, referred to as long term capital gains taxes. The tax rate for those are usually around 0-20% depending on your tax bracket.

Did you know that President Biden is reportedly proposing to raise taxes on long-term capital gains for individuals earning $1 million or more to a whopping 39.6%. Added to the existing 3.8% investment surtax on higher-income investors, that tax could rise to 43.4%, not counting state taxes.

Can you imagine losing almost half of your home selling profits right off the bat?

Understanding Exclusion Sums and Application of Taxes

To start with, the exclusion sum identifies the amount on which capital gain taxes are not applied. This sum differs whether you are single or married. Single people are exempted up to $250,000 while a married couple is not required to pay gain taxes on a maximum sum of $500,000. However, the condition is that both partners would have contributed towards the house. To understand how this works, let us go through an example.

    • Consider that you have purchased a house for $100,000 and the selling price is $900,000. This means that the total gain is $800,000. Now, according to regulations, single people do not have to pay a tax on $250,000. This means that capital taxes will be applied on a sum of $650,000. However, if the same house was bought by a couple, the exemption amount would have been $500,000. This means that the taxes would have been applied on $300,000.
    • For property owners, it is important to understand these rules particularly when they are aimed at earning selling profit. As a result, they have to pay capital tax gain even when they do not have any idea about it. A good tip, in this case, is gathering basic information about capital gain taxes and the exemptions you can avail of.

When are Capital Gains Taxes Applied Without Any Exemptions





Sometimes there are exemptions that can be made to avoid capital gains taxes when you sell your home.

Ownership is less than 2 years

The exemption conditions are linked to the duration for which the owner has owned the house. Suppose that in 5 years, the owner held the ownership for 20 months.  This means that you held the ownership for less than two years. By regulations, the exemption condition becomes void if the owner has not been for a minimum of two years.

Living in the house for less than 2 years 

The implication of this condition is very similar to the one related to ownership. Homeowners must check the span for which they have lived in the house for 5 years.  No exemptions are provided if the owner has lived in the house for less than 2 years.

Tips for A Capital Gains Tax Exemption

In most cases, property owners do not get exemptions on capital gains taxes because they do not have enough awareness. Here are some tips that can help you in getting exemptions.

Use the property for living for a minimum of two years.

As mentioned above, exemptions are related to the length for which house owners stay in a house. Before you sell a piece of property, check the period for which you have lived in it. If you have not completed two years, then it is better to delay the sale so that the needed exemption is attained. This is something that intelligent sellers do. They delay the sale deal to ensure that the capital gain tax is applied on the smallest possible sum.

Seller Finance Your Property to an Investor

Seller financing your property to an investor can pay off big time in multiple ways. First, you can avoid paying your capital gains taxes on the sale of your home. Next, you are able to get paid residually every single month by the investor. If you structure the deal right, the investor paying your mortgage can even boost your credit score. Win-Win-Win!

Record of renovations and improvements

Is it important to keep a record of the money spent on renovation and improvements? The answer to this question is yes. The more you have spent to gain ownership of the house, the less would be the percentage of capital gain tax. However, having the needed record is very important. It helps in reducing the capital gain tax percentage.

Bottom Line

Not being aware of the conditions of Capital Gain tax can cause several problems. If you are a home owner, take out some time and get a feel of these tax implications work. It would help you in saving money.

We can help you defer your capital gains taxes when you sell your home with us! We will sit down with you to determine the best exit strategy for the sale of your home. Click or call (704)-327-2120

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