Avoiding Capital Gains Tax When You Sell Your Home
When you have an asset that appreciates in value, you normally have to pay capital gains tax on the increase that you earn. However, when this comes in the form of a home, it is worth noting that you often receive an exemption from paying the capital gains tax. (With home prices on the rise again, more people are starting to consider selling.) But you do have to properly qualify. My Life ROI offers this information on the general rules to avoiding the capital gains tax when you sell your home:
You can exclude $250,000 in profit from the sale of your main home. If you are married, you are allowed to exclude a total of $500,000.
What do I mean by main home? You need to have owned and lived in the home for a minimum of two years. These two years do not necessarily need to be consecutive as long as they are within the past five years.
You can use this “2 out of 5 year rule” to exclude your profits from the sale of your home each time you sell. For the most part, you can only use this exclusion once every two years.
Of course, there are always exclusions, which is why you need to check with a tax professional before making any decisions. You want to make sure you are getting the most out of your tax exclusion, as well as make sure that everything is done above board.
Additionally, you can use what is known as a 1031 exchange in order to avoid other tax issues. This can even work when you are buying foreclosure and short sale properties. But, again, you want to make sure that you are careful to consult with a knowledgeable professional to make sure everything is handled properly.
In the end, there are a number of tax benefits associated with owning and selling a home. It is vital that you consider the benefits, and do your best to maximize them, no matter what stage of home ownership you are in right now.
