How
to Avoid Capital Gains Tax When You Sell Your Manhattan Beach
Home.....
There
are a lot of reasons to buy real estate. You can buy with
a minimal cash investment. Real estate tends to appreciate
in value over time. If you occupy the property, the federal
government subsidizes your housing expense with tax write-offs
for mortgage interest and property taxes. If that’s not
enough incentive, consider the tax benefits you receive when
you sell.
Homeowners
who have owned their homes for at least two years are entitled
to a capital gains tax exemption when they sell. For married
couples that file jointly, the first $500,000 of gain is taxfree.
For single individuals, the exemption is $250,000. In either
case, the property must be a primary residence that you occupied
for 2 of the 5 years before selling.
The current
capital gains exclusion for primary residences can be taken
every two years. So conceivably you could buy ahome, experience
two years of appreciation, sell the property, receive tax-free
gain, buy another property and repeat the sequence again and
again.
The Taxpayer
Relief Act of 1997 significantly changed the federal tax laws
regarding the sale of a principal residence. Under the current
law, you don’t need to invest in another home in order
to defer capital gain liability, as was the case previously.
Even if you sell your home and rent indefinitely, you’re
entitled to take the $250,000 (individual) or $500,000 (married
couples) capital gain tax exemption.
Contractors
and renovation specialists are making good use of the current
tax law. Some builders are choosing to occupy a home they’ve
recently built rather than sell it new. After establishing
the 2-year minimum residency
requirement, they sell the property and are eligible for the
$250,000 (individual) or $500,000 (married couples) capital
gain tax exemption. Home buyers with fix-up expertise can
use this strategy to help build wealth. First, buy a fixer
and move into it. Fix it up and live there for at least two
years. Then sell, take your tax-free gain and buy another
fixer. But don’t even consider this approach unless you
like moving a lot and you can live comfortably in a construction
zone. You’re only entitled to cash in on tax-free capital
gain on the sale of your primary residence. If you own income-producing
property, you must pay tax on the gain when you sell unless
you complete a 1031 tax-deferred exchange. A 1031 exchangeallows
you to roll gain from one income-producing property into another
income-producing property. You ultimately have to paytax on
the gain, but a 1031 exchange permits you to defer capital
gain tax payment in the future.
HOME
SELLER TIP: Some homeowners are incorporating current
tax law into their retirement planning. Recently, an Oakland,Calif.,
couple sold an apartment building using a 1031 Exchange. With
the proceeds, they purchased, or traded into, a home they’ll
ultimately occupy when they retire. Until they retire, the
property will be rented. So, they traded onerental property
for another and deferred paying tax on the gain. At retirement,
they will sell their current residence and collect $500,000
of tax-free gain. Then they’ll move into the rental property
they acquired in exchange for the apartment building they
sold years before. For tax purposes, they’ll convert
the rental property to their primary residence and will avoid
paying tax on the gain of the investment properties.
THE
CLOSING: Federal tax laws are in a continuous state of
flux, so be sure to consult a knowledgeable tax advisor before
you buy or sell, particularly if income property is involved.
State tax laws vary, so consult with an expert in your area.
