Can I Avoid Paying Capital Gains Taxes on the Sale of My Home

513 E Baylor LnWhen you are selling your primary residence, it is very common that the value of the home is greater than at the time you purchased the property. Generally speaking, any time there is an advancement of value either by work effort or investment, the government(s) places claim to levy taxes on those gains, real estate appreciation is no different. There is good news however in that as of 1997, the Federal Taxpayer Relief Act offers a provision to exclude a portion of the gain on our personal residence.

Specifically, Internal Revenue Code 121 allows for couples filing a joint tax return can exclude up to $500,000 of capital gain on the sale of their primary residence, and single filers can exclude up to $250,000.

The home must have been the primary residence of both spouses two of the last five years. The exclusion is available once every two years. Net capital gain (the sale proceeds minus the purchase price minus capital improvement) is taxed at the applicable tax rates (15% or 20% federal, plus possibly the 3.8% Medicare tax).

Frequently Asked Questions

Q. Do the years have to be consecutive?
A. No, you can live in the property for one year and rent for one, then live in it again for another year so long as you have two full years of personal occupancy.

Q. What if I live in the home for two years, then rent it for three?
A. That works but the two-year tax payer occupancy is a safe harbor requirement. If you’re not careful, the time required to sell the home at the conclusion of the rental period will erode the owner’s occupancy therefore disqualifying the tax shelter.

Q. I have a property that was first used as a vacation home but it has become our primary residence. Does this sale fall within the provisions of the code?
A. It can, provided there are two years of tax payer primary occupancy plus other holding period requirements.

Q. Are there other provisions of the code for special circumstances such as death, divorce, and other events?
A. Yes, it is always recommended that you seek out the advice of an appropriate tax or legal professional to be certain that you are in strict compliance with the provisions of the tax code before you take action.

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The opinions expressed by the owners and agents of Peak Realty Advisors, LLC are published for educational and informational purposes only, and are not intended as specific investment advice or as a substitute for professional legal or tax advice. Please consult an appropriate legal or tax professional for your specific investment needs or concerns.

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