Over the past few decades, home values have been on the rise, and selling your property can lead to significant profits.
If you’re considering selling your home or investment property and want to know how to avoid paying taxes, you’re not alone
However, these profits may come with a substantial tax bill. Here’s how to avoid paying taxes when selling your property and keep more of your hard-earned money. The first thing to understand on how to avoid paying taxes is that there’s a significant difference between selling a property you live in and one you rent out or hold as an investment. The IRS and state tax agencies classify your home as a capital asset, which means you could owe capital gains taxes on the profit from the sale. This profit is calculated by subtracting the sales price from the purchase price, including adjustments like closing costs and Realtor commissions.
One way how to avoid paying taxes is to minimize your tax liability by making your home your principal residence. This status is achieved when you’ve lived in your property for at least two of the past five years. If you meet this requirement, you can exempt up to $250,000 in capital gains from the sale, or $500,000 for married couples filing jointly. If your profit is under these thresholds, you won’t owe any taxes.
For military personnel facing relocation, an exemption from the “two in five” requirement can be granted if your move is due to a new assignment, as long as you meet specific criteria
Additionally, the 1031 exchange, also known as a “like-kind” exchange, allows you to exchange one investment property for another without recognizing the gain immediately. To utilize this option effectively, it’s advisable to consult with a tax expert.
For those who don’t meet the “two in five” eligibility rule, exceptions may apply for reasons related to work, health, unforeseeable events, or other circumstances. The IRS provides guidance on exceptions in Publication 523. Moreover, you can reduce your tax burden by deducting the cost of capital improvements that meet specific criteria.
Another strategy on how to avoid paying taxes is to consider an installment sale, where the buyer makes payments over time. This approach allows you to spread out tax gains over multiple tax years, potentially reducing the overall tax impact.
In conclusion, when it comes to how to avoid paying taxes when selling your home or investment property, understanding the rules, exemptions, and options available to you is crucial. Seeking guidance from a tax expert is advisable to navigate the complexities of the tax code and ensure you keep more of your profits. For further information and specifics on these tax strategies, consult the IRS website.
READ ALSO: Student Loan Scams Pose Threat As Repayment Resumes