How to Avoid Capital Gains Tax

You can avoid capital gains tax when selling a house. 

It seems to be an elusive and complex burden, but real estate owners can legally avoid or reduce paying taxes by implementing the following list of strategies.

Definition: What is a Capital Gains Tax? When someone sells a certain asset at a gain or profit, those earnings become taxable. In real estate particularly, the person pays a special amount at a certain rate known as Capital Gains Tax.  The most common types of capital gains are property, stocks, bonds and precious metals. 
In California, the long-term capital gains tax is usually 32.1%. It includes the Affordable Care Act, IRS (15%), California (13.3%) and Health Care (3.8%). This is the usual range for married couples in the 25% income tax bracket.  Through tested knowledge and assistance from a seasoned realtor, you can keep more of your hard-earned money.
 

1. Exclusion for Primary Residence

You could reduce capital gains obligations if you have used your property as your primary residence. The tax exclusion ranges up to $250,000 for single home owners and up to $500,000 for married home owners upon meeting the requirements of home ownership test. The test includes passing the requirement of becoming a resident in the property for 2 years within the 5 years prior to the date of sale. 

2. Tax-Deferred Exchange (1031 Exchange)

Also known as Starker Exchange. This tax exemption was based on section 1030 under the United States Internal Revenue Code hence it was called 1031 Exchange. It allows a taxpayer to defer paying capital gains on exchanged properties that are held for investment, trade or business purposes. 
 
What is an “exchanged property?” It is when you roll the proceeds of your sale into a similar rental investment. Properties used for rental or investment purposes can avail of this exclusion. 
Rental income properties which were primary residences before may also apply for this exclusion with some conditions.

3. Deferred Sales Trust

If you sell an investment or personal property, you can defer taxation through this strategy. 

4. Home Renovation

Wise home investors purchase a below-the-market house and make it as their primary residence while they do the renovations. They will then sell it for a better sales price without the capital gains tax through the primary residence exclusion.

5. Transfer property ownership to family members in the low-income bracket.

Your can give a highly-appreciated securities as a gift to a family member in a low-income bracket and receive another kind of appreciation in return. The IRS allows If the family chooses to sell the asset, his or her income tax rate will be used, not yours. The tax rate will be according to their own income bracket. If on the year of selling the property your family member falls within the 10% to 15% ordinary income tax bracket, he or she could avoid the capital gains tax entirely.

6. Reduce Taxes via Investment Losses

If you are an investor, selling of securities at a loss in a given year can be used to offset capital gains. You can use the losses of value in your Mutual funds to decrease your liabilities for those securities that realised gains.

7. Give to charity

When you give your appreciated stock to a charity without selling your shares, you get the value as a tax deduction and the charity doesn’t pay any when they sell the stock. The list above are ways to avoid capital gains which were compiled by a long-time Foster city resident and Intero Realtor, Gwen Chua.  He partners with San Francisco Chapter of the California Society of Tax Consultants (CSTC) to help sellers reduce or defer their capital gains tax.

If you want to know your home value and save more in selling your home, click here.

Gwen Chua Intero Real Estate Services

650-255-1511
Gwen is a seasoned agent in real estate business specialising in Foster City, Redwood, San Mateo, Millbrae & South San Francisco properties. He attends continuing education classes with the San Francisco Chapter of the California Society of Tax Consultants on a monthly basis. Accountants, CPAs, and EAs attend these meetings and provide a wealth of information and experience. About Intero Real Estate Services Intero Real Estate Services, Inc., a Berkshire Hathaway affiliate and wholly owned subsidiary of HomeServices of America Inc., serves Northern California with 13 offices throughout the greater Silicon Valley. The Intero Franchise network is comprised of nearly 50 affiliates located in Alabama, Arizona, California, Colorado, Nevada, Tennessee and Texas. The company is headquartered in California’s Silicon Valley. About California Society of Tax Consultants The California Society of Tax Consultants, Inc. (CSTC) has been a nonprofit organization for the benefit of tax professionals throughout California since 1966. Programs cover a wide spectrum of tax topics that are approved for CTEC, EA & CPA credit.

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