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
As a native Eastern North Carolina girl, I always dreamed of one day living in the mountains. In 1994, that dream came true when life brought me to the Boone area. I made my home on one of the most beautiful mountains in the High Country and knew immediately that this is where I belonged. In the 26 years that I have lived here, I have worked in many roles. Beginning as a hist-technologist, then a full-time mom and volunteer in various positions and organizations in the Boone community. Leading Watauga Education Foundation and serving as producer of their Shooting Stars Talent Showcase was one of the highlights of my volunteer work. When the time came for my children to leave the nest and go to college, I decided that I would pursue a new direction in life. Real estate seemed to be just the adventure I was looking for.  Working in real estate gives me many opportunities to share my knowledge and love of the High Country with others, as well as, finding new friendships and connections along the way. 

I am a graduate of Peace College and NC State University. I love music, craft things, nature and wildlife. I enjoy hiking, camping, boating, and spending time outdoors with my family. I am a member of Boone United Methodist Church where I am active in the United Methodist Women and Women's Ministries.  My greatest loves are my two children Addie and Will and my dog, Daisy and cat, Oscar. 

There is so much to see and experience in the High Country. I look forward to helping you explore as we find your perfect place.