Q:

How can you avoid paying capital gains on a rental property?

A:

Quick Answer

You can avoid paying a capital gains tax on selling a rental property if you use the proceeds to buy another property within 45 days, Investopedia states. Alternatively, convert the rental property to your primary home or offset the gains by selling another investment resulting in a capital loss.

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Full Answer

The internal revenue service lets you rollover the sales proceeds to a like-kind property. You should place the money in escrow, find a new property within 45 days and complete the transaction within 180 days, Investopedia advises.

The IRS provides a tax exclusion of $250,000 for single taxpayers and $500,000 for married people filing jointly on capital gains from selling a primary residence. If this property was your primary home before, you can live in it again for two more years and sell it to take advantage of this allowance, provided you have owned the property for a total of five years when you sell. If you have not lived in the home before, your allowance is reduced proportionately by the time it served as a rental property, reports Zacks.

Another option provided by tax law is the "tax loss harvesting," Zacks explains. If you have another investment that results in a capital loss on selling, you can use that loss to offset the capital gains from the rental property.

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