You’ve inherited a property or have owned it for a long period of time
If you’ve lived in your home for over 30 years or inherited a property that’s been in your family for decades, your home’s value may have increased exponentially.
“I’m working with a couple right now that has lived in their house for 52 years,” Carter says. “They paid $17,000 dollars for it, and its market value right now is $200,000.”
“They’re married, so they don’t have to pay any capital gains tax on it, but somebody who’s in a house for an extended period of time could see huge market gains in terms of value and may be subject to capital gains tax,” he adds.
According to the U.S. Census Bureau, the median value of single-family homes in the United States rose from $30,600 in 1940 to $428,600 in 2023, after adjusting for inflation. Before adjusting for inflation, the median value of a single-family home in the U.S. in 1940 was just under $3,000.
Due to inflation, a property that you or your family have owned for extended periods of time might have a capital gain that doesn’t actually correlate with your profit. So, the longer you’ve owned the property, the more likely you’ll have to pay capital gains tax for the value inflation.
You’ve lived in the home for less than 2 years or excluded property from capital gains tax within the past 2 years
The qualifications for capital gains exclusions require you to live in the property as your primary residence for at least 2 of the last 5 years — and if you’ve sold a property that was excluded from capital gains within the last 2 years, you aren’t allowed to exclude a property again.
To avoid these scenarios, be strategic with the timing and logistics of your home sale. The following tips will help you duck the capital gains tax with simple planning.
How to avoid capital gains tax
1. Live in your house for at least 2 years
Again, if your house isn’t your primary residence for 2 years, you’ll have to pay capital gains tax when you sell it.
So, even if you realize your house isn’t the forever home you originally thought it was — stick it out for a couple of years before you move on.
2. Don’t rent your house for long periods of time
Sure, renting your house out is a great way to make some extra income to help with your mortgage payments.
But, you can only meet the capital gains tax exclusion guidelines if your home is your primary residence. Income properties or investment properties are subject to capital gains tax — and the IRS could ask for proof that you actually lived at the property for two years.
“Keep any records of that you might need if there’s any question of whether you owned the home,” Rigney says. Records like utility bills and statements with your name and address on them will help you make your case in this situation.
3. See if you qualify due to an unexpected move
If you’re forced to move for a reason outside of your control, you qualify for deductions from the capital gains tax.
“If something comes up — you get a new job in a new city, and you’ve only owned your home for a year and a half, you can still exclude a portion of your gain if you meet the qualifications to do that,” Rigney says.
He explains further that the following situations can help you reduce your capital gains tax if you sell your home and you fall outside of the general exclusion guidelines:
You have to sell your home for health reasons.
You got a new job in a different location.
You unexpectedly have kids, and your house isn’t big enough.
4. Calculate your basis carefully
The higher your cost basis, the smaller your capital gain…. So, a precise cost basis calculation could save you from exceeding the capital gain threshold ($250,000 gain for single tax filers and $500,000 gain for joint filers).
“When you’re including the cost of your improvements, you just need to have your invoices. If you hire a contractor, make sure you have invoices that show that amount. If you did it yourself, you can’t include the value of your services, but you can include all the materials that went into it and any permits that you have to pay for. You’re going to need records in case you get audited,” Rigney says.
5. Sell your house before filing for divorce
Joint filers have a larger threshold for tax-free capital gains — $500,000 of exempt gains, as opposed to $250,000 for single filers. So, if you are going through a divorce, sell the house before your split’s official to avoid paying capital gains.
Work with a tax professional who specializes in divorce and can act as a neutral third party in coordination with your real estate agent to keep you and your spouse’s financial best interests top of mind.
6. Plan to sell before your gain exceeds the exemption
If your local real estate market skyrockets, your home’s value will go up, up, and away in line with other properties in your area.
In that case, you can mitigate your capital gains by keeping tabs on your adjusted cost basis using a basic formula:
Original cost of asset
plus (+)
Improvements to asset
plus (+)
Repair of damages to asset
minus (-)
Depreciation to asset
minus (-)
Deducted casualty loss to asset
equals (=)
Adjusted basis of asset
That adjusted basis is your capital gains number. As soon as that number starts inching up close or beyond the tax-free threshold for your filing status, you’ll have to pay taxes on your profit.
So, plan your moves strategically to avoid a large, taxable gain.
What are the capital gains tax rates in 2024?
Your capital gains tax rate depends on your tax bracket — so your income determines at which percentage your home sale profit will be taxed.
Please note that the income thresholds and tax rates provided below are for tax year 2024. It’s always recommended to refer to official IRS publications or consult with a tax professional for accurate and up-to-date tax information.
Short-term capital gains tax rate
Income threshold (single)
Income threshold (married filing jointly)
37%
Over $609,350
Over $731,200
35%
Over $243,725
Over $487,450
32%
Over $191,950
Over $383,900
24%
Over $100,525
Over $201,050
22%
Over $47,150
Over $94,300
12%
Over $11,600
Over $23,200
Long-term capital gains tax rate
Taxable income
Single filers
0%
$0 to $47,025
15%
$47,026 to $518,900
20%
$518,901 or more
Married filing jointly
0%
$0 to $94,050
15%
$94,051 to $583,750
20%
$583,751 or more
Source: IRS
Rigney provides some examples to help you put these tables into perspective:
You’ll pay none: If you are a single filer and your total income is less than $47,025, or you’re a joint filer and your total income is less than $94,050, then you’re in the 0% capital gains bracket.
You’ll pay some: If you’re a single filer from $47,026 all the way up to $518,900, you’re in the 15% bracket. If you’re joint and your income is $94,051 up to $583,750, you’re in the 15% bracket. “So that’s a huge range,” Rigney adds.
You’ll pay more: And then once you get over that $518,900 a year as a single filer and $583,750 for joint filers, that gets you into the 20% bracket.
The higher your income, the more you’ll owe on capital gains — that is, if you don’t qualify for any exclusions.
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