Avoiding Capital Gains Tax

What You Should Know About Home Selling And Capital Gains

There is a way around capital gains taxes, and it's through home sales exclusion. Homeowners everywhere know about the tax breaks the US government is serving up, especially the ones on tax deductions and mortgage interest. Home sellers stand to benefit big time. Majority of them will not owe the IRS (Internal Revenue Service) a cent.

Some Info On Capital Gains And Selling Your House

Selling your main residence can earn you profits amounting to as much as $250,000. That's as a single owner. You can make two times that amount if married. All these come with no capital gains taxes owed.

In the past (pre-May 7, 1997), people escaped having to pay taxes on profits made from home sales one way: using the same money to purchase other, pricier homes within a couple of years. Sellers age 55 and older had another option. They could opt for a one-time tax exemption offer in profits worth nearly $125,000.

The passing of the 1997 Taxpayer Relief Act eased the home sale tax load borne by the millions of homeowner taxpayers. Per-sale exclusion amounts seen today, replaced the once-in-a-lifetime or rollover alternatives.

Who Is Qualified? This is determined through the "USE" checklist or test. Exemptions restricted to every couple of years. People are only exempted from home sale capital gains taxes once per two-year period.

1. USE Test - You're qualified for home sale capital gains tax exemption if you owned and inhabited a residential place for two of the last five years prior to selling, but there can be interruptions in the timeframe involved. You can reside in the house during year 1 and rent it out for the next three years, move back in for year 5 and still be eligible.

2. Failing the USE Test - If you flunked the USE test, there's still hope. You can avail of prorated exclusions on capital gains, provided your home was sold because you switched jobs, had health reasons or other unexpected circumstances. Say you lived in a house for just one year because of employment changes. This entitles you to an exemption of $125,000 or half the original $250,000 exemption you would've gotten.

3. Nursing home exception - Although ordinarily you're required to own and reside in the property for two of the most recent five years, this requirement can be driven down to just one of the five years for those who wind up living in nursing homes. Even better, the length of stay in nursing homes is credited to the USE test, treating the nursing home much like the original house.

If you've been toying with the idea of selling your house for months, but are a few months shy of the two-year requirement, hang in there just a bit more until you complete the entire 24 months. It will mean bigger capital gains for you.

This article is just general information on capital gains tax on real estate sale. You should always consult with a tax person or an attorney at law on any tax matters or questions you may have on capital gains taxes on real estate.

Avoiding Capital Gain to Maximize Profit

This article is written expressly for the purpose of reading in the United States of America, since it is the American system upon which the article is based. Readers outside the US may find the system in their respective countries to be different or similar.

Investing in anything means putting capital into it, and hoping it will grow. When it does grow and the time comes to collect, you may soon find that you will not get the maximum amount due to taxes. If these assets become more valuable under your ownership, you could face capital gains. The tax applied to the sale of non-inventory assets like stocks, bonds, and real estate whose value has gone up from the time they were acquired is called capital gains tax. Simply put, if you buy stocks, bonds, or real estate and are able to sell them for more than what they cost you, you are required to pay a capital gains tax.

Now we understand that taxes are necessary to ensure better lives for everyone, but that does not mean it doesn't hurt to pay taxes. Capital gains taxes can be particularly difficult, since one may feel that they are entitled to the whole amount. There is a way to avoid capital gains taxes though, called a 1031 exchange. This refers to provisions made possible via the Internal Revenue Code section 1031, which specifies how capital gains and associated taxes can be deferred.

The gist of it is that you do not "sell" your assets, but instead "exchange" them for something else. There is a fundamental difference there, and that is why 1031 exchanges can help you get the max out of your investment's growth. To illustrate, perhaps an example is in order.

Say you own stocks in a mining company. That mining company has performed well for the past years, and has seen its value rise. Your stocks in turn grow to about 1.2 times the original size. Now, if you were to sell those stocks and cash out so to speak, you would lose some amount to taxes and not get the total 120% return of investment you wanted. Instead, you can reinvest that amount by exchanging your current stocks with stocks totaling a higher value from another mining company. This will not garner any capital gain, since no sale was made and so no tax could be placed against it. You retain your 120% return of investment fully, although it remains in stocks form and not cash. If you planned to invest the money anyway, then this is definitely worth a shot. This exchange of assets with no loss constitutes a 1031 exchange.

The application for a 1031 exchange is rather complicated, as is anything that has to do with finance and taxation. There are rules which identify eligibility to apply, as well as conditions to be satisfied for it to be considered legal. It would be best to turn to a qualified professional for advice, or to a Qualified Intermediary to actualize it.