Here are a few exclusions that can help with the capital gains tax.
If you’re thinking about selling your home, you may be worried about the capital gains tax on the sale. The market has appreciated a lot, so there’s good reason to be concerned. Home prices have appreciated by about 20% just in the Sacramento area! Luckily, two exclusions allow you to avoid the capital gains tax.
The first is a section 121 exclusion. With this, you don’t have to pay taxes on up to $250,000 of the capital gain on your primary residence. If you’re married, that amount goes up to $500,000. There’s also a calculation you can do with your accountant that factors in all sorts of things to raise this number.
The second one is a 1031 exchange, which I’ve used a few times myself. With it, you can defer the capital gains when you sell an investment property by buying a new investment property and putting the gains toward it.
“You don’t have to pay taxes on up to $250,000 of the capital gain from your primary residence.”
There’s also procedure 2005-14. This allows you to take the capital gains under section 121 and invest any additional gains into real estate under the 1031 guidelines. Two conditions have to be met for this: You must have lived in your home for two of the last five years, and you must have used the home as a rental property immediately before the sale.
I am not a tax professional, so if you want to use these exclusions, I can help you weigh your options, but you should also talk to your accountant. If you are thinking about selling real estate this year, call me so we can sit down and start planning. I’d be more than happy to answer all of your questions.