How to Avoid Capital Gains Tax

Pennies stacked beside a wooden house to pay for capital gains taxes.

If you’re thinking about buying or selling real estate in the High Country, capital gains tax should be on your radar.

If you are selling a property, it will be an immediate concern, but even if you are purchasing you should be considering it as part of your strategy since you might sell the property again one day.

Here’s a summary of what capital gain taxes are, how they are calculated, and tips for avoiding them when you sell your property.

What are Capital Gains Taxes?

Capital gains taxes are levied against the sale of a handful of assets.

In the world of real estate, capital gains are calculated as the total sale price minus the original cost of the property.

You are paying taxes on the appreciation of the asset during the period of time in which you own it.

Capital gains taxes are due even on properties that are inherited, but there are some nuances.

Accountant calculating capital gains tax after a real estate sale.

How is it Calculated?

Capital gains are calculated differently from standard property tax assessments.

The assessed value is used to determine the difference between the original cost of the home and the appreciation value of the property. You often can find assessed value in a home appraisal report.

Calculating appreciation can be daunting. In theory, you would owe capital gains tax on the amount of appreciation calculated for the property.

If you don’t sell the property immediately, you can use the step-up basis for the tax.

This means that you would only be taxed on the difference in value since you owned the home and not since the original purchase was made by whoever you inherited the property from.

There are some differences for military families too, though they are complex and subject to change as the tax code evolves.

The standard timeline for capital gains taxes on real estate is five years, but since military families might have to relocate for various reasons, they can “pause” the clock and utilize a 15 year period instead.

Are There Different Tax Rates?

There are a handful of different tax rates for capital gains taxes on short-term gains.

If you have owned the home for less than one the tax rate for short-term gains ranges from 10% to 37%.

For long-term capital gains taxes, there are three brackets: 0%, 15%, and 20%.

Lines showing appreciation in value as it increases.

Do You Have to Pay Capital Gains When Selling a Home?

You do not always have to pay capital gains tax when you sell a home.

There are different tax exemptions that the IRS uses to exclude taxes depending on the type of dwelling for sale.

If the property is a primary residence, and you have occupied it for two out of the past five years (this doesn’t have to be consecutive), you can qualify for an exemption of up to $250,000 for single filers and $500,000 for married couples.

If the property for sale is an investment property, you will not qualify for an exemption as it is not your primary residence.

Tips for Minimizing Capital Gains Tax

Some tips for avoiding or minimizing capital gains tax when selling real estate include:

  • live in the house for at least two years
  • keep receipts for home improvement projects
  • Deduct your home office expense
  • Sell when your income is lower
  • Use a 1031 exchange to defer the taxes.

Navigating capital gains tax can be complex. First-time homebuyers need to be especially aware of looming tax bills pending after their first sale before they close on their home.

Be prepared! Our agents at 828 Real Estate can help you navigate the finances surrounding your home purchase.

About the Author

"I am a proud Boonie and feel grateful to call the High Country home. Hailing from Rome, Georgia, I am the youngest of three brothers, the proud son of a German and a native Atlantan. It only took one college visit for me to fall in love with Boone in 2011. After four years of school and various jobs in the community, I was offered an opportunity to hit the road and work all over the East Coast. I worked in construction management/sales and property inspections for insurance companies. The year of 2018 was a monumental year for me as it saw me complete my degree in Business Management and buy my home in downtown Boone, where I run an Airbnb (the Bent Street Bungalow). I live with my two dogs, Redman and Junior, and spend more time than I should in my garden or out in the woods with my pups. I bring a passion for people, connections and diplomacy to the table and love applying that to being a Realtor. My experience in construction and sales provide a unique set of tools for the world of real estate. I am so excited to help you facilitate your Boone experience and truly believe there’s no place quite like the 828. I love Boone for the normal reasons—cool air, storied mountains, vibrant rivers and so on, but I also love Boone because it is just so easy to have a good day here. The community is unlike any other I have experienced and I look forward to growing with it for a long time to come. Working in real estate is my full-time endeavor so I am fully invested in helping you with my knowledge of the area, my enthusiastic work ethic and my creativity in marketing to ensure that the best possible result is achieved.”