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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