How to Avoid Capital Gains Tax

When it comes to selling a home, you want to do everything that you can to avoid capital gains tax. If you have a capital gain on your home, you do not want to have to pay a big portion of this money to the federal government. Here are the basics of how to avoid a capital gains tax on the sale of your home.

The Rules

In the past, whenever you sold a home, you would have to pay capital gains taxes on the amount that you earned from the sale. According to today's tax laws, this is no longer the case as long as you meet certain requirements. Currently (in May 2010), there is a capital gains tax exemption when you sell your house that could provide you with $250,000 of tax-free profits if you are a single owner. If you are married, you can receive as much as $500,000 in tax-free profits from the sale of the house. This is potentially a huge boon for homeowners that you can definitely take advantage of. In order to qualify for this program, you have to meet certain eligibility requirements. Here are a few things that you will have to keep in mind if you want to qualify.

Primary Residence

This tax exemption applies only to your primary residence, not a vacation home nor a rental property. You have to live in the property in order for this exemption to count. If the residence is not your primary one, you should not try to take the exemption because you could get into serious trouble.

Time Requirements

In addition to this property's needing to be your primary residence, you also have to live in the property for a certain amount of time to qualify for the exemption. According to the IRS, you have to have lived in the property for at least two out of the last five years. This does not necessarily mean that you have to live in the property for two consecutive years, though. You can spread the two years out over the course of five years and still qualify for the exemption. This means that if you purchase the house and live in it for one year, then rent it for three years, and then live in it another year, you would be eligible for the capital gains tax exemption.

Frequency

With this program, there is no limit to the amount of times that you can qualify for the exemption. If you want, you could take advantage of this exemption every time that you sell a property. In order to use the exemption more than once, you will have to wait at least two years. Since you have to live in the property for two out of the last five years, you have to wait for two years to pass before you can get the exemption again.