How to Avoid Capital Gains Tax on Real Estate
Selling a property can be stressful enough as it is, even before dealing with capital gains tax. This post will not only cover the basics, but provide you with effective strategies to minimize, or potentially to avoid altogether, your capital gains tax liability.
The profit you make after selling a property that you originally paid less for is considered a capital gain. The IRS mandates reporting and payment of taxes on all capital gains. There's a 15-20% long-term capital gains tax rate for sellers, but that's contingent upon income. If you've owned your home for a substantial period and it has appreciated significantly in value, selling it could result in a hefty tax bill.
Single filers can be exempt up to $250,000 of their profits from taxes when they sell their primary residence. The exemption for married couples who file together is up to $500,000. You qualify for a primary residence exclusion when you have owned your house and have used it as your primary residence for at least two out of the five years preceding the sale. This means that if gains are less than your exemption limit or if you sell after two years then you may be able to avoid capital gains taxes altogether.
Taking advantage of a 1031 exchange, also known as a like-kind exchange, is another way to reduce capital gains tax. It involves taking the proceeds from the sale of one property to purchase a similar property. Another option is to invest in an Opportunity Zone, which is a designated area that offers tax benefits to investors who develop or improve property in the zone.
In addition to these options, deductible expenses can also be factored into reducing taxable profits or gains from a sale. This might include things like real estate commissions, legal fees, and other closing costs. In addition to these options, deductible expenses can also be factored into reducing taxable profits or gains from a sale. This might include things like real estate commissions, legal fees, and other closing costs. In order to make the most of your tax deductions, keep organized records of expenses like receipts and invoices.
Note that short-term capital gains are taxed as ordinary income up to 37%. If you sell a property less than a year after purchasing it, this means you face a higher tax rate. Be aware that rental properties have different tax exemptions than primary residences.
To gauge how much money you should receive after a sale and your capital gains tax liability, use a tax bracket calculator. For personalized advice or extra support in navigating complex tax laws, consult with a tax professional. By understanding the basics of capital gains taxes and taking advantage of these tax-saving strategies, you can ensure that you maximize the return of your real estate sale.
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