Q:

How do you avoid real estate capital gains tax?

A:

Quick Answer

To avoid real estate capital gains taxes, you should satisfy certain primary residence rules, as noted by Forbes. These rules allow a home owner to exclude certain gains from income if the home serves as a primary residence for at least two of the five years before the sale date.

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Full Answer

The Internal Revenue Services defines the rules for primary residence exclusion, as noted by the organization's official website. As of 2014, the exclusion amounts are $250,000 for individual taxpayers and $500,000 for married couples filing jointly. Other criteria, including prior home sales and related 1031 transactions, also factor into the exclusion figure. The total amount subject to the exclusion is the selling price less any selling expenses and the adjusted basis. Basis is generally the price paid for the property, as noted by the Internal Revenue Service.

Various rules also apply to determine the actual sales price of the home. For instance, the value of personal property that is included with the transfer of the home should be excluded from the sale price, as noted by the Internal Revenue Service. Personal property includes furniture, draperies, rugs, washers and dryers. In addition, if the property sale is the result of a job transfer, any compensation received from an employer to assist with the move is not included in the sale price. Reduction of the sale price ultimately reduces the amount subject to capital gains tax.

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