Selling a house is a tiresome and expensive process, and when putting your home for sale, taxes are inevitable. There are few things you can do to help you avoid taxes and make your experience less stressful.
Capital gains tax is a type of tax that applies to capital gains when a person sells an asset for more value than its original price. There are two types, the short-term capital gains that are generally higher and apply if the property is owned less than a year, and the long-term capital gains that apply once the property is owned more than a year and are at a reduced tax.
Strategies to avoid capital gains on sale of home
Wait five years after purchasing the property to sell it
To be exempted from the tax you must have lived at the property as your primary residence for at least two years. Profit on the home would be taxed as capital gains if the home was not used as a primary residence for the required time.
Track all expenses made for the home
Track every cent spent in home improvement and presented it in the final cost with receipts and documents to help minimize profit and exempt you from the tax. Maintenance and cleaning costs are not included, but advertising and agent’s fees are.
Wait till you are experiencing losses
Selling during a time of low finances such as loss of a job or one partner quits work will place you in the 10% to 15 % bracket and exempt you from paying capital gains tax.
Limit rental of property
Renting out a property for more than three years will make it be classified as an investment and taxed as income. To avoid the risk, sell your home two years after moving out.
Selling your investment home
The main goal of investing is to make profits but selling an investment you run the risk of having huge taxes to pay. If you have an investment property, there are strategies to follow to exempt you from paying capital gains tax.
Donate to charity
Donating part of the profits to charity will exempt you from paying capital gains tax and significantly reduce your taxes. Once you donate ask for a reduction in tax.
Exchange instead of selling
Exchanging similar assets will help you avoid capital gains tax until the time you sell the home. This occurs when you sell one property and buy another similar one within 180 days.
Gift your home
Gifting your home to a family member who is in low tax bracket will help exempt you from capital gains tax, and you can sell your investment without stress. If they decide to sell the property, it is charged at their rate which might be little to none.
Avoiding capital gains tax can be done by using these simple strategies and can help you save thousands of dollars. It is however recommended that you seek advice from a tax expert to make sure you have everything right.