How to Prevent Capital Gains Taxes When Selling a House

Financial planning can help lower your taxes when you sell your house.

Selling a house can be a very lucrative transaction, but you can end up owing substantial capital gains taxes. A commercial property developer cannot easily avoid these taxes; however, a homeowner can sidestep them under the right circumstances and benefit significantly. Careful financial planning is an important part of the equation for saving money on taxes.

Instructions

1. Buy a house or condo that you can live in. If you buy a house just for resale and don't live in it, you'll have to pay capital gains taxes. Choose a house you'll want to live in for two years.

2. You must live in the house for at least two of the last five years. These years don't have to be consecutive. You can live in the house for one year, move out for three years and then return for the last year. While you live in the house, it must be your primary residence, however.

3. Sell only one house during this time. Only one house can be sold tax-free within a two-year period. You can sell additional houses but you will owe capital gains taxes on those properties. If want to sell another house that you've lived in for two of the last five years, wait two years after you sell the first house before selling the next one.

4. Calculate the amount you will make on the sale. The first $250,000 of profit you make on the sale is tax-free if you're single; for married couples, the first $500,000 is tax-free. The law used to require you to reinvest this gain in another house within two years to avoid taxes, but that is no longer the case.

References

• Investopedia: Sell Your Home and Not Pay Capital Gains Tax