Avoiding Capital Gains Taxes - A Mistake Or A Benefit
November 29, 2004
By Payal Pathak
Joe and his wife purchased a home and only lived
in it for 5 months. In a very short time, the housing
costs in our area skyrocketed. Their house was worth
around $100,000 more than what they paid for it. They
wanted to sell it for avoiding capital gains taxes.
Their main concern was also that if they sold it
and reinvested all the money in a more expensive home
would they be managing to avoid paying the capital
gains tax.
The US capital gains taxes state that unless a person has lived
in one's home for two of the past five years, he shall be entitled
to pay 15 percent capital gains tax on the profits. In case of Joe
and his wife, it would amount to $15,000. For any American couple
this is a point to ponder on reaping benefits on sale of real estate.
To avoid getting hit by tax on capital gains the best choice with
Joe would be to wait another year and a half until you can keep
all of the profit tax-free? This can be best choice if there is
no immediate threat that this is a temporary spike in prices of
the property and that prices will ultimately fall.
If that's the take, then they should sell and move into something
that has more potential to increase in profits down the line or
use their windfall and move into an area with a better school district.
But on the other hand, if the prices are expected to be shoot up
further in real estate or be stable then paying a little tax is
better than missing all of the profit on the sale of real estate
and capital gains benefit on it thereof.
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