As long as you lived in the house or apartment for a total of two years over the period of ownership, you can qualify for the capital gains tax exemption. If you own an additional property that you plan to sell, you will need to plan ahead to lower your tax liability.
Three ways to avoid the tax liability include:. You might find that an investment property you rent and plan to sell has spiked in value. It may be a good idea to move into the rental for at least two years to convert it into a primary residence to avoid capital gains.
You can also take advantage of a exchange. Known as a like-kind exchange, it only works if you sell the investment property and use the proceeds to buy another, similar property.
The Tax Cuts and Jobs Act added Opportunity Zones — areas around the country that have been identified as economically disadvantaged. And any gains after 10 years will be tax-free. If you still have capital gains after taking advantage of exemptions and exclusions, focus on lowering the amount of the taxable profit or gains. Some qualifying deductions include:. How We Make Money. Cynthia Paez Bowman.
Written by. Edited By Lance Davis. Edited by. Lance Davis. If the wife sells the home nine months later, she may tack on her ex-husband's ownership to meet the two-year ownership test. Also, the husband may tack on his ex-wife's continued use of the residence to meet the two-year use test.
Widowed taxpayers may also tack on the ownership and use by their deceased spouse. If you sell a home that you sometimes used as a vacation or rental property and sometimes as your primary residence, you're eligible for only that portion of the capital gains exclusion that corresponds to the amount of time you actually lived there as your primary residence. The rest of the time is called "non-qualifying use.
What's more, if during the five years before the sale, you never actually made the home your primary residence, you're likely disqualified from using the exclusion. You won't be surprised to hear that this new rule was meant to generate additional tax revenue to offset some other tax cuts. The exclusion does not apply to depreciation allowable on residences after May 6, If you are in a high tax bracket and plan to live in your home for a long time, taking depreciation deductions for a home office is quite valuable right now.
If you expect huge gains from selling a house -- more than can be excluded from tax -- you should consider ways to divide ownership of the house. For example, say a couple owns their residence together with their adult son perhaps because they've given him a share.
If part or all of your gain on the sale of your residence is taxable, you'll pay tax on the gain at capital gain tax rates. These rates are lower than personal income tax rates provided that you owned the home for more than one year. If you owned the home for less than one year, you pay tax on your gain at your personal ordinary income tax rate.
The rate you'll pay depends on your tax filing status and your total taxable income. But, if your income is low enough, your capital gain tax rate is zero. The personal income tax brackets are adjusted each year for inflation. The following chart shows the applicable capital gain tax rate based on taxable income.
If you have an installment sale, report the sale under the installment method unless you elect out. Even if you use the installment method to defer some of the gain, the exclusion of gain under Section remains available.
More In Help. Qualifying for the Exclusion In general, to qualify for the Section exclusion, you must meet both the ownership test and the use test. Reporting the Sale If you receive an informational income-reporting document such as Form S, Proceeds From Real Estate Transactions , you must report the sale of the home even if the gain from the sale is excludable.
Suspension of the Five-Year Test Period If you or your spouse are on qualified official extended duty in the Uniformed Services, the Foreign Service or the intelligence community, you may elect to suspend the five-year test period for up to 10 years. To best determine whether or not your sale is exempt, you may want to speak with a qualified tax planner. Internal Revenue Service. Selling Your Home. Real Estate Investing.
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