How to claim capital gains exemption house property sale?

Taxes are inevitable when you sell or transfer your house property or other immovable properties. The gains earned on selling of properties have different rules of taxation.A capital gain tax is a tax you pay on the gain earned on selling of properties. For tax purpose, the gains on the sale of properties are classified in two types, depending upon the number of months you held the property before selling the same.

  • Short-term capital gains-if property was held for  less than one  year
  • Long-term capital gains- if the property was held for 1 year or more

Important to note that on long term capital gains you pay maximum tax @ 20% whereas short term capital gains are taxed  normal  taxed  at the same rate as ordinary income. You can use this long term capital gains calculator.Here are the tax rates and calculator for long term capital gains tax.

Is there any capital gains exemption available ?

Section 121 of US Code 26 provides that capital gains on the sale  of a primary residence shall be tax-free up to  $ 2.50.000. If you are filing the joint return with your spouse, exemption amount goes to $500,000. In order to claim capital gain exclusion for sale of primary residence or this basic exemption, following conditions must be fulfilled:

  1. You’ve owned your home for at least two years in the five years before you’ve looked to sell it.
  2. Your home was your primary residence for at least two years of that same five-year period.
  3. You haven’t taken a capital gains exclusion for any other property sold at least two years before this current sale.

The relevant portion of Internal Revenue Code ( 121 ) is given below :

(a)Exclusion

Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.

(b)Limitations

(1)In general

The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000

Read the full provision u/s 121 of US Code 26 

How can I reduce capital gains tax on a property?

So, section 121 of IRC provides, if you fulfill the following conditions, you can claim maximum exemption upto $ 250,000 under section 121 of IRC.

  • Wait at least five years after you’ve bought a property to sell it.
  • you need to live in your primary residence at least two of the five years before you sell it.

The  2-year periods’ test may not be consecutive years but two years stay can be a different period in five years.

Five-Year Test Period can be 10 years period !

There are certain situation under which, the rule of 5 years can be 10 years. So, for people in Uniformed Services, the Foreign Service or the intelligence community, there is an option to  suspend the five-year test period for up to 10 years, if they  posted for more than 90 days or for an indefinite period

  • At a duty station that’s at least 50 miles from your main home, or
  • Residing under government orders in government housing.

Are there any other specific capital gains exemptions available ?

Yes. Investors can look to IRC 1031 that provides capital gains exemption .Section 1031 of Internal Revenue Code  (changed recently under Taxes & Jobs Cuts Act ) allows you to trade “like-kind” properties to avoid paying taxes on the initial profit. These like-kind properties must be similar: You can trade a retail space for another retail space, but you can’t trade a retail space for a rental property.If the value of one property is greater than the other, you can add cash to the deal. The person who owns the property of lesser value can pay any difference at the time of sale.

Like-kind property can be any property held for productive use in a trade or business or for investment. Any type of investment property can be exchanged for another type of investment property. For example,

  1. a single-family residence can be exchanged for a duplex,
  2. raw land for a shopping centre, or
  3. an office for apartments.

 

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