How To Avoid Capital Gains Tax - Just Stay In Your House For 2
Years
November 25, 2004
By Srinidhi Goenka
A lot has been written about what is capital gains
tax. We all know that. But the crucial question is
how to avoid capital gains tax and still remain a
law-abiding citizen. There are many ways by which
an individual can avoid making such payments.
The most common area where we all get affected is
when we have to sell our homes. Then, the capital
gains tax plays an important role in our profits and
losses. How we can avoid the capital gains tax in
such a situation is explained through the following
example.
A Method to Avoid Capital Gains Tax- An Example
Let us assume that you are a married couple and own two houses.
One house is valued at $700,000 where you have been living there
for 2 years. The other one has been recently purchased for $650,000.
You want to sell one of these houses. You would prefer to sell
the $650,000 house as you are very happy with the $700,000 one.
The profit from the sale of the $650,000 would be $100,000 but capital
gains tax would have to be paid as you have not lived there for
the minimum time period of 2 years i.e. $15,000.
Thus, the simple answer here is to sell the house which is more
profitable for you. But then, the question of capital gains tax
also arises and the fact that the $650,000 property has been recently
purchased, its chances of appreciation are better in the future.
So the ideal solution would be to sell the $700,000 house, even
though you prefer it, and make the profit without paying any taxes.
Then, reside in the $650,000 house for 2 years and then sell it
- tax-free, of course.
As can be seen from the above example, the key element here is
the 2 year time period. The law says that you do not have to pay
any capital gains tax if you want to sell your residence provided
you have resided in that house for a minimum period of 2 years up
to $250,000 per person (i.e. $500,000 for a married couple). Otherwise,
the capital gains tax is at a maximum rate of 15%.
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