Avoid Capital Gains Tax, Max Your Profit When Selling Property

How to Avoid Capital Gains Tax when Selling Your Property

When it comes time to sell your home you’ll most likely make a decent profit due to your home’s appreciation. This is where Capital Gains Tax comes into the picture. Keep reading to learn what Capital Gains tax is and how to avoid it.

What is Capital Gains Tax?

Any investment you acquire, even your home, is considered a capital asset. The difference between the amount you paid for your property and the amount you sold it for is known as capital gain. Capital gains tax is a tax collected by the IRS on the profit made from the resale of your property. There are two types of capital gains tax: short-term and long-term. Short-term capital gains tax is collected when you sell within less than one year of owning the property while long-term capital gains tax is applied when you sell your property under the two-year mark.

When is Capital Gains Tax Applied?

Short-term and long-term capital gains tax can be collected when you sell your home less than two years of owning the property. If you’re needing to sell your home under the two-year mark, you may qualify for an exemption. As with all tax information and advice, consult with a tax professional or CPA before the sale of your home.

How Much Does Capital Gains Tax Collect?

For most individuals, the tax rate on the capital gain will not exceed 15% of your net profit. According to the IRS, you may be taxed 0% for only a portion or the total amount of your net capital gain if your taxable income is less than or equal to $41,675 for single and married filing separately, $83,350 for married filing jointly or qualifying surviving spouse or $55,800 for the head of the household.

How to Avoid Captial Gains Tax

Live in your home for at least 2 years. To avoid capital gains tax when selling your primary residence, you must have lived in the home for two years or more. If you’ve lived in your residence for less than two years, the profit you make from selling your home will be subject to capital gains tax. If you are selling within one year of ownership you’ll hurt your profit even more by being subject to short-term capital gains tax.

You can qualify for an exception. You may qualify to be exempt from Capital gains tax under certain conditions such as a work relocation, health reasons, unforeseeable events, or property acquired as a gift or through a decedent. To see if you qualify for an exemption, visit IRS Publication 523 for more information.

Deduct home improvements. You can use your home’s purchase amount and improvements to contribute to your cost basis. Generally, the higher your cost basis the less you’ll be taxed. Keep all of your receipts for your home’s improvements and maintenance costs.