Q:

Can you avoid the capital gains tax when you sell real estate?

A:

Quick Answer

Homeowners can completely avoid or greatly diminish a capital gains tax bill when they sell their primary residence if they meet certain residential requirements, explains Realtor.com. Property owners can avoid paying capital gains taxes on rental properties by reinvesting their profits into a similar property, according to Investopedia.

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Full Answer

As of 2015, people who sell their primary residence after living in it for two out of the past five years can claim a $250,000 capital gains exclusion if single or a $500,000 exclusion if married, according to Realtor.com. Therefore, if a qualifying couple bought a house for $250,000 and later sold it for $750,000, they do not pay capital gains on the property. However, if the couple sold the house for $800,000, they owe capital gains tax on $50,000. Homeowners can also deduct the cost of substantial home improvements, such as adding new roofing or flooring, from their capital gains calculations.

If someone sells a rental property, they owe capital gains tax on the difference between the sale price and the purchase price, plus any depreciation claimed on the property during previous tax years, explains Investopedia. To avoid paying capital gains tax, sellers can place the funds they receive into escrow and use the money to invest in more real estate by buying a similar type of property.

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