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How to avoid capital gains tax on real estate?
Hi, How do I avoid paying capital gains tax on real estate? We're planning to move, rent for a bit to see what neighborhood is best for us, and then buy a home. It might take a year or so before we buy our next home. But we don't want to pay capital gains tax. Is there a way to avoid this?
Asked By Carol | Glenview, IL | 872 views | Finance Legal Info | 2 years ago
Answer(5)
Gloria Mitchell
Wilkinson Triad Realty
1. Use primary residence exemption: The primary residence exemption can be used to exempt any gains realized on the sale of a primary residence from capital gains taxes. In order to qualify, the home must have been the primary residence of the homeowner for at least two of the past five years.
2. Defer taxes with a 1031 exchange: Section 1031 of the Internal Revenue Code (IRC) allows investors to defer the payment of capital gains taxes when they reinvest their gains into a “like-kind” investment, such as another real estate property.
3. Defer taxes with a charitable donations: A charitable donation can be made in exchange for a tax break, allowing homeowners to reduce their capital gains taxes by donating a portion of their gains to a qualifying charity.
4. Use cost-basis adjustments: The cost-basis adjustment is a procedure in which the owner of an investment property can adjust the price paid for a property to reduce the owner’s taxable gain. This can be done by rolling over capital gains from the sale of an investment property into a comparable, lower-priced investment property.
5. Take advantage of available tax credits: Some states offer capital gains tax credits for specific improvements made to a property before it is sold. These credits can help reduce the taxes owed in the event of a gain.
2. Defer taxes with a 1031 exchange: Section 1031 of the Internal Revenue Code (IRC) allows investors to defer the payment of capital gains taxes when they reinvest their gains into a “like-kind” investment, such as another real estate property.
3. Defer taxes with a charitable donations: A charitable donation can be made in exchange for a tax break, allowing homeowners to reduce their capital gains taxes by donating a portion of their gains to a qualifying charity.
4. Use cost-basis adjustments: The cost-basis adjustment is a procedure in which the owner of an investment property can adjust the price paid for a property to reduce the owner’s taxable gain. This can be done by rolling over capital gains from the sale of an investment property into a comparable, lower-priced investment property.
5. Take advantage of available tax credits: Some states offer capital gains tax credits for specific improvements made to a property before it is sold. These credits can help reduce the taxes owed in the event of a gain.
- 2 years ago
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Jim Rossi
RE/MAX 2000
Contact a CPA or financial adviser to discuss your situation with them in detail. Capital gains may not even apply.
- 2 years ago
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Brinda Griffin
Griffin Realty Llc
If the home was your primary residence for the last 3 of 5 years, more than likely you may not pay capital gains tax. There are limitations on how much equity you receive etc. Definitely consult a local reliable tax accountant.
Good Luck!
Good Luck!
- 2 years ago
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Important disclaimer: I'm a real estate professional, not an accountant or tax advisor. For specific tax strategies, you should definitely consult with a qualified CPA or tax professional who can review your unique situation.
That said, here are some common strategies people use to minimize or avoid capital gains tax on real estate:
For Primary Residences:
Section 121 Exclusion - If you've lived in your home as your primary residence for at least 2 of the last 5 years, you can exclude up to $250K (single) or $500K (married) in capital gains
Timing matters - Make sure you meet the 2-year residency requirement before selling
For Investment/Income-Generating Properties:
1031 Like-Kind Exchange - Defer capital gains by reinvesting proceeds into a similar investment property within specific timeframes (45 days to identify, 180 days to close)
Installment Sales - Spread the gain over multiple years by receiving payments over time
Opportunity Zones - Invest gains into qualified opportunity zone funds for potential tax benefits
Hold until death - Properties receive a "stepped-up basis" when inherited, eliminating capital gains for heirs
General Strategies:
Offset with losses - Capital losses from other investments can offset real estate gains
Improve your basis - Keep records of all improvements and renovations that increase your property's cost basis
Consider timing - If you expect to be in a lower tax bracket next year, timing the sale might help
For your specific situation (moving and renting first):
Since you're planning to rent for a year before buying, make sure you understand how this affects your primary residence status for tax purposes.
Next steps:
Consult with a qualified CPA or tax advisor
Gather all documentation of improvements and original purchase costs
Consider the timing of your sale in relation to your residency requirements
Remember, tax laws change and everyone's situation is different. A tax professional can help you navigate the best strategy for your specific circumstances.
That said, here are some common strategies people use to minimize or avoid capital gains tax on real estate:
For Primary Residences:
Section 121 Exclusion - If you've lived in your home as your primary residence for at least 2 of the last 5 years, you can exclude up to $250K (single) or $500K (married) in capital gains
Timing matters - Make sure you meet the 2-year residency requirement before selling
For Investment/Income-Generating Properties:
1031 Like-Kind Exchange - Defer capital gains by reinvesting proceeds into a similar investment property within specific timeframes (45 days to identify, 180 days to close)
Installment Sales - Spread the gain over multiple years by receiving payments over time
Opportunity Zones - Invest gains into qualified opportunity zone funds for potential tax benefits
Hold until death - Properties receive a "stepped-up basis" when inherited, eliminating capital gains for heirs
General Strategies:
Offset with losses - Capital losses from other investments can offset real estate gains
Improve your basis - Keep records of all improvements and renovations that increase your property's cost basis
Consider timing - If you expect to be in a lower tax bracket next year, timing the sale might help
For your specific situation (moving and renting first):
Since you're planning to rent for a year before buying, make sure you understand how this affects your primary residence status for tax purposes.
Next steps:
Consult with a qualified CPA or tax advisor
Gather all documentation of improvements and original purchase costs
Consider the timing of your sale in relation to your residency requirements
Remember, tax laws change and everyone's situation is different. A tax professional can help you navigate the best strategy for your specific circumstances.
- 2 months ago
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Joe Bourland
EXP Realty
100% agree with Jim Rossi.....contact a trusted CPA before doing anything.
- 2 years ago
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