How to Avoid Capital Gains Taxes on Real Estate

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If you sell your home and make a profit, you may have to pay taxes for the capital gains on your home sale if you can’t qualify for an exemption.

Here are tips on how to avoid the capital gains tax.

What is the capital gains tax?

Capital gains are the profits you make from the sale of a capital asset, such as a home or stocks, according to the Internal Revenue Service (IRS). When selling your home, the amount of money you pocket after paying off your mortgage and related obligations is considered a capital gain. If you sell your home for less than it’s worth, then it’s considered a capital loss.

There are two types of capital gains and losses: short-term and long-term. Short-term gains or losses come from assets that are sold less than a year after they’re bought. Long-term gains or losses apply to assets that were sold more than a year after their purchase.

Capital gains count as income and may be taxed. Short-term capital gains tax rates match standard income tax rates, while long-term capital gains tax rates vary by filing status and income.

Long-term capital gains tax rates by filing status and income:

Filing Status0%15%20%
Single$0-$39,374$39,375-$434,549$434,550+
Married Filing Separately$0-$39,374$39,375-$244,424$244,425+
Head of Household$0-$52,749$52,750-$461,699$461,700+
Married Filing Jointly$0-$78,749$78,750-$488,849$488,850+

How to avoid the capital gains tax on real estate

You could partially or fully avoid a capital gains tax on your home sale if:

  • You’ve owned and lived in your home for at least two of the last five years, or you qualify for an exemption (more on this below).
  • Your home sale profits fall below the threshold for your filing status.

For the 2019 tax year, single taxpayers can exclude up to $250,000 in capital gains on their home sale, while married couples filing jointly can exclude up to $500,000. In either case, these exemptions are contingent on certain requirements and apply only to the sale of a primary home.

If you own multiple homes, you’re required to pay capital gains taxes on the sale of any home that isn’t your main residence.

Understanding the capital gains exemptions for real estate

You may qualify to either fully or partially exclude the capital gains on your home sale from being taxed. Below, we break down the eligibility requirements for each exemption type.

Full exemption

You must meet the IRS eligibility test to be eligible for the full capital gains exemption on your home sale. The eligibility test requires you to meet the following requirements.

  • Ownership. You must have been the owner of the property for at least two of the last five years. If you’re married, only one spouse needs to meet this requirement.
  • Residence. You must have used the home as your primary residence for at least two of the last five years. The residency does not have to be completed consecutively, but both spouses must meet this requirement.
  • Look-back. You must not have used the capital gains tax exemption on another home sale within the past two years.

Borrowers who meet these criteria may take advantage of the maximum exemption allowed by the IRS. However, you may be automatically disqualified for the exemption if:

  • You're subject to the expatriate tax, which is required for permanent residents.
  • You acquired the property through a like-kind exchange over the past five years.

Partial exemption

Even if you don't qualify for the full exemption, you may still be eligible for a partial exemption to the capital gains tax. The IRS is fairly lenient toward homeowners who need to sell their homes due to a number of special circumstances.

  • Work-related move. You, your spouse or other co-owner took a new job or were transferred to a job site that's located more than 50 miles from your original home. The 50-mile distance applies to new workplaces if you were not previously employed.
  • Health-related move. You, your spouse or other co-owner moved to provide for the medical care of a close family member or as the result of a doctor recommendation in order to treat a health problem. The IRS defines family as your:
    • Parent, grandparent or stepparent.
    • Child, grandchild, stepchild, adopted child or eligible foster child.
    • Sibling, half-sibling or stepsibling.
    • Parents or siblings by nature of marriage (e.g., mother-in-law).
    • Uncle, aunt, nephew or niece.
  • Unforeseeable events. Your home was condemned, damaged or destroyed. You, your spouse or other co-owner gave birth to two or more children from the same pregnancy; passed away; divorce or some other unforeseeable event as identified by the IRS.

How to calculate your partial capital gains exemption

Your partial capital gains exemption is calculated as a percentage of the full exemption you could’ve qualified for if you’d met the requirements, proportional to the number of months you lived in the property for up to two years.

For example, if you're eligible for a partial exemption and lived in the residence for 18 out of the past 24 months, you could claim 18 out of 24 months or 75% of your full exemption. You would exclude $187,500 (75% of $250,000) as a single taxpayer, or $375,000 (75% of $500,000) if you’re married filing jointly.

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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