Q:

How do you avoid capital gains taxes when selling your home?

A:

Quick Answer

Consumers avoid capital gains taxes when selling their homes by taking advantage of the real estate capital gains tax exclusion detailed in the Taxpayer Relief Act of 1997, reports Bankrate. To qualify for the exclusion, taxpayers must meet the residency requirements stipulated in the law.

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Full Answer

According to the Taxpayer Relief Act, when selling a primary residence, a homeowner is allowed up to $250,000 in capital gain tax-free, states About.com. Married couples filing jointly are allowed up to $500,000 in capital gain, as of 2015.

Although capital gain is ostensibly the buying cost minus the selling price of a piece of real estate, various deductions and additions work to the seller's advantage, according to Nolo. When calculating capital gain, homeowners can subtract selling costs such as advertising, title insurance, real estate agent's commission, and legal, administrative, inspection and escrow fees from the overall selling price. Homeowners can add home improvement costs and purchase expenses to the original buying price of the home.

To establish residency sufficient to pass the ownership and use test, homeowners must live in the home before the sale for at least two out of the past five years, as reported by Nolo. Certain situations qualify as exceptions to the residency rule, such as homeowners moving due to divorce, job requirements, health considerations or multiple childbirth. The time a homeowner spends in a nursing home counts as home residency for capital gains tax exclusion considerations. Military personnel being deployed are exempt from residency requirements when selling homes, according to Bankrate.

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