How to Avoid Capital Gains Tax on Sale of Property

by Emma Watkins

    When you sell your home, up to $250,000 in profits are excluded from capital gains tax. You can double the exemption amount if you are married. But it takes more than subtracting the sale price from the property's original cost to figure out whether you owe capital gains tax. You must pass the IRS’ ownership and use test. If you qualify, deduct not only what you paid for the home, but also capital improvements and closing costs from the sale price to calculate your profit.

    Step 1

    Live in the home you intend to sell for at least two continuous or non-continuous years in the five years that will have preceded the sale date. This guarantees you pass the ownership and use test.

    Step 2

    Ask a loan officer to estimate the closing and selling costs you will pay on the sale of your property. Add this figure to the amount you paid for it. To this total, add any capital improvements you made.

    Step 3

    Deduct depreciation from the total you reached in Step 2. An accountant can calculate for you how much your property has depreciated since you bought it.

    Step 4

    Establish an asking price for the property. Subtract it from the total from Step 3 to verify that your potential profit falls within the capital gains tax exemption limits.

    Tip

    • Special circumstances qualify you for the capital tax gains exemption even when you do not pass the ownership and use test. Stays in nursing homes and an unexpected move because of a job transfer are two such events. A tax accountant can advise you if you are not sure whether your situation makes you eligible for the exemption.

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    About the Author

    Emma Watkins writes on finance, fitness and gardening. Her articles and essays have appeared in "Writer's Digest," "The Writer," "From House to Home," "Big Apple Parent" and other online and print venues. Watkins holds a Master of Arts in psychology.

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