Selling properties can be a difficult task when it comes toCapital Gain Tax payments on the revenue. However,there are multiple ways to avoid Capital Gain Tax by using various loopholes inthe system legally. Smart people always find a way or techniques to cover up ina way which incentivizes unintentionally.
What is Capital Gains Tax?
All the assets which you own including Car, Stocks, Bonds,and home are capital assets. When you sell any of above item more than you paidthen it is known as Capital gain.
You must report this profit or increase in revenue to IRS,they will then calculate tax on your capital gains. You can also qualify for CapitalGain Tax Exemption if you meet the criteria below.
How to Qualify for Capital Gains Tax Exemption
Entrepreneurs make huge profits in real estate businessduring a hot property market. However, you may want to secure your profits andavoid capital gain tax payment on your profits. You can qualify Capital gaintax exemption if you fall under these criteria;
- You ownthe home for at least 2 years – This may sound a hard thing to people whoflip houses very frequently. In such a scenario you may subject under the short-term capital gain tax. But it will only beapplied if you own the home for less than1 year.
- You’velived at least 2 years in the home – You must live in the house for atleast two years even though it’s not mandatorythat 2-years you lived in there are not consecutive.
- Youhaven’t exempted recently – You can enjoy this exemption as-long-as youhaven’t enjoyed this option during recent 2-years.
“The pros for exemptions are higher for homeowners.”Said by Steven Wolpow – managing partner at Nussbaum Yates Berg Klein & Wolpow.
Wolpow added that “Tax advantage is tremendous where you sell your home at a gain and youcan repeat it again for an unlimited time.”
But homeowners must have to keep records of their spending and payments on their home along with anything they spent on improvements.Wolpow
Furthermore, he also says that homeowners must be aware of requirements which you have to fulfill to take full advantage from Capital Gain Tax Exemption.Steven
What Amount one can Exempt with Capital Gains
It depends on your case and filing status. The maximum limitfor exemption on capital gains tax is up to $250,000 for one person. However,you can get up to $500,000 if you are married and filing jointly. Here is an examplefor better understanding which we discuss with Tax Expert at a reputable firm.
“If a couple bought a house in 2009 for $180,000 and lived in it until they decided to sell the house to enjoy a higher return on it. Finally, they sold the house for $280,000 in 2018 so their total gain will be $100,000 and it is under the max. the amount so fully exempt from tax.”
Furthermore, an expert said that couple must be lived together in that home for at least two years to qualify for the exemption. But no matter you are married in that period or not – Just co-habitation is enough.Says Tax Expert
But more importantly,you have to follow all the above rules to qualify for tax exemptions.
Difference between Long-term and Short-term Capital Gains
The period of ownership matters and your tax amount may vary with the length of your ownership and yourtax bracket.
- Short-term:All the assets which are owned for less than a year. Your tax bracket rate willbe the rate on this gain.
- Long-term:All the assets owned for more than one year. The rate depends on your taxbracket, you may not pay anything or may pay up to 20%.
Tax expert recommendsthe use of long-term gains whenever possible;
“Long-term gains are taxed at lower rates if compared toshort-term capital gains. That’s why people normally prefer to hold homes formore than a year after consultation with a taxexpert. However, there are other investing strategies for which sometimesselling with short-term gain is more beneficial than long-term gains.”
Tip: Keep all the records of your home updates safe with you this will help you to make your capital gain tax lower. Remodeling, new appliances, updated floors, and other home improvements cost can be made lower with capital gains tax when the time for selling homes.