Most people are proud to own a property no matter how small it may be. There’s so much profit to gain when you invest in real estate which is why most people try as much as possible to own a property. Though there’s gain in investing in real estate, it comes with some downsides.
As a capital asset, you’re liable to pay tax on any profit you make when you sell your property or your home. As a homeowner, you need to understand how capital gains work so you can learn how to avoid them as much as possible.
What Are Capital Gains Taxes?
All your properties and possessions are capital assets including properties like cars, real estate, stock or bonds, and investments. Assuming you sell one of your properties, you’re liable to pay a tax on the profit you make after selling which is called capital gain tax.
There are two types of capital gains which include long-term capital gains and short-term capital gains. You have to pay long-term capital gains when you sell an asset that has been in your possession for more than a year. And you have to pay short-term capital gains for assets you’ve owned for not more than a year.
When Do You Have to Pay Capital Gains Taxes?
You’re only required to pay capital gain taxes when you realize a profit from the sale of any of your properties. Once you sell an asset for more than what it’s worth, then you must pay capital gain tax on it. If you don’t sell the asset or property, then you’re not required to pay capital gain tax.
How to Avoid Capital Gains Taxes When Selling a House
Whenever you sell a property or your house, you’re required to pay capital gain tax as long as you make a profit from the sale. However, there are ways you can avoid paying the capital gain tax or minimize the payment of these taxes. What are these methods?
- The 2-out-of-5-year rule
This means that you don’t have to live in a house for a long period if you want to avoid this tax. When you do this, you’ll be able to qualify for the use and ownership tests.
- Qualify for a partial exclusion
You can avoid paying capital tax gain for special reasons or conditions. According to IRS Publication, you’re qualified for an exclusion of capital gain if you sold your house because of work, health, or unpredictable circumstances. If you sold your house due to these conditions, you can escape paying some of your taxable gains.
- Hold on to home improvement receipts
When you want to sell your home, you can’t sell it at the price you bought it because you’ve made some repairs, renovations, and improvements over time. You can reduce the amount of your capital gains tax if you have proof of the cost basis of your home which is why you have to hold on to receipts.
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