to Avoid Capital Gains Tax When You Sell
Your South Bay Home.....**
There are a
lot of reasons to buy real estate. You can buy with a minimal cash
investment. Real estate tends to appreciate in value over time.
If you occupy the property, the federal government subsidizes your
housing expense with tax write-offs for mortgage interest and property
taxes. If thats not enough incentive,
consider the tax benefits you receive when you sell.
have owned their homes for at least two years are entitled to a
capital gains tax exemption when they sell. For married couples
that file jointly, the first $500,000 of gain is taxfree. For single
individuals, the exemption is $250,000. In either case, the property
must be a primary residence that you occupied for 2 of the 5 years
capital gains exclusion for primary residences can be taken every
two years. So conceivably you could buy ahome, experience two years
of appreciation, sell the property, receive tax-free gain, buy another
property and repea the sequence again and again.
Relief Act of 1997 significantly changed the federal tax laws regarding
the sale of a principal residence. Under the current law, you dont
need to invest in another home in order to defer capital gain liability,
as was the case previously. Even if you sell your home and rent
indefinitely, youre entitled to take the $250,000 (individual)
or $500,000 (married couples) capital gain tax exemption.
and renovation specialists are making good use of the current tax
law. Some builders are choosing to occupy a home theyve recently
built rather than sell it new. After establishing the 2-year minimum
residency requirement, they sell the property and are eligible for
the $250,000 (individual)
or $500,000 (married couples) capital gain tax exemption. Home buyers
with fix-up expertise can use this strategy to help build wealth.
First, buy a fixer and move into it. Fix it up and live there for
at least two years. Then sell, take your tax-free gain and buy another
fixer. But dont even consider this approach unless you like
moving a lot and you can live comfortably in a construction zone.
Youre only entitled to cash in on tax-free capital gain on
the sale of your primary residence. If you own income-producing
property, you must pay tax on the gain when you sell unless you
complete a 1031 tax-deferred exchange. A 1031 exchangeallows you
to roll gain from one income-producing property into another income-producing
property. You ultimately have to paytax on the gain, but a 1031
exchange permits you to defer capital gain tax payment in the future.
TIP: Some homeowners are incorporating current tax law into
their retirement planning. Recently, an Oakland,Calif., couple sold
an apartment building using a 1031 Exchange. With the proceeds,
they purchased, or traded into, a home theyll ultimately occupy
when they retire. Until they retire, the property will be rented.
So, they traded one rental property for another and deferred paying
tax on the gain. At retirement, they will sell their current residence
and collect $500,000 of tax-free gain. Then
theyll move into the rental property they acquired in exchange
for the apartment building they sold years before. For tax purposes,
theyll convert the rental property to their primary residence
and will avoid paying tax on the gain of the investment properties.
Federal tax laws are in a continuous state of flux, so be sure to
consult a knowledgeable tax advisor before you buy or sell, particularly
if income property is involved. State tax laws vary, so consult
with an expert in your area.
**Information above is for general knowledge. We are neither CPAs
nor attorneys and cannot give legal or tax advise