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Capital Gains Tax: How to Avoid it As You Sell Your Home

Real Estate "sold" sign with red brick building and trees blurry in the background

They say that only two things are inevitable in life; death and taxes. While death is certainly inevitable, taxes come with loopholes that help you to (legally) avoid them. One of the selling a house is to understand capital gains tax and – perhaps more important – how to avoid it. It’s a key part of knowing how to sell a house. Here are five ways to do just that.

  1. Hold the Property for at Least a Year

    This one is the most obvious, so it’s good to start with. If you sell a property within a year of purchasing it, then you’ll be hit with a higher income tax rate. That is, assuming the property sells at a profit, which it likely will considering Minnesota house prices.

    Keep a property as a rental for at least a year before trying to sell it on. This is also good for you because it means that your tenants are putting money towards your mortgage while the house appreciates. You’ll make money before making a lot of money by putting the house on the Minnesota real estate market.

  2. Live in the Property for Two Years

    If you can wait a few years to sell the property, you may as well live there. If you’ve lived in it for two of the past five years at the very least, then the capital gains tax is exempt up to $250,000 for single people and $500,000 for married couples.

    This is what is known as a live-in flip, where someone buys a house, lives in it while fixing it up, and sells it on for a profit. The best part is that the profit you make is entirely tax-free.

    This also ties in with our first tip. If you let someone live in the property for a few years, the house can appreciate more before you sell it on. Or you could move into a rental property for a few years and then sell it. The main thing is that you have to have lived in it for at least two of the past five years, so you qualify for a Section 121 exclusion.

  3. Leverage a 1031 Exchange

    The IRS themselves give you the chance to avoid Capital Gains Tax with a “like-kind exchange” as outlined in Section 1031 of the tax code. To keep things simple, they allow you to take the profit you make from selling a property and use it to purchase another property and push the capital gains tax on that other property.

    The other property has to be similar to your current one, hence why it is called a “like-kind exchange.” It generally refers to a property used for a similar purpose, such as selling one rental property and buying another.

  4. Invest in a Property Using a Self-Directed IRA

    Assets that are owned under an IRA or a Roth IRA are free to grow tax-free. That means you could buy and sell property on the Minnesota real estate market through an IRA and reinvest the proceeds how you see fit.

    This does mean that when you retire, you’ll be hit with a bunch of gains that you’ll then have to pay taxes on. Provided you use a traditional IRA, that is. Use a Roth IRA, though, and you can look forward to tax-free withdrawals.

    The downside to using this method is that you have to put some effort into setting up that self-directed IRA. It also costs some money to set up. Then, of course, you have to buy a home and know the steps to selling a house and put all the work in there too.

  5. Sell Assets at the Right Time

    If you’ve recently lost your job or started a business or are otherwise making losses, then this could be the best time to sell a house in Minnesota. If things aren’t going well in terms of your income, then you might be able to get away with paying 0% capital gains tax.

    If you are single and you have an adjustable gross income of under $39,375 ($78,750 for married couples), then you don’t owe a penny in capital gains tax. Let’s also be honest and admit that you might need that money if you aren’t doing well.

Final Thoughts

Capital gains tax can be lower than regular income tax, but that doesn’t mean that it’s any fun to pay. There are several ways to avoid paying capital gains tax that is completely legal, some of which are even encouraged by the IRA. Keep these methods in mind when the time comes to sell your home.