Avoiding Capital Gains Tax On Real Estate – Some Important Tips

Real Estate is something that everybody wants, and invests in. One reason is to have your own house, and the other is to take advantage of a possible rise in real estate values. Both are subject to the laws regarding how it will be treated in real estate tax laws. Therefore, it is important to know something, if not everything about what are the tax laws governing real estate taxes. Of course, your tax consultant is the best person to brief you on this. This article skims over the surface of the tax laws. Remember your tax consultant is the right person to advise you.

Capital gains tax is not levied on the sale of your ‘primary’ residence, so long as you have declared it as your ‘primary’ residence. You must have lived in the house you sold for at least two years before you can claim it as your ‘primary residence’.If your profit from the sale is not greater than $ 250,000, if you are a bachelor/spinster, and $ 500,000 if you are married. You pay capital gains tax on the balance of the amount over the limits specified above. To make it clear, let’s say you are a bachelor and you sell your primary residence for $ 260,000. You will have to shell out capital gains tax on $ 10,000, which is exactly the difference between the limit fixed under law. If you are married, then you don’t pay capital gains tax! Why because the limit above which capital gains tax is payable is $ 500,000. If the sale is above that price, you only pay, as shown, on the differential between the limit, and what you sold it for.

One can use the definition of primary residence to still make money on real estate, and not pay the capital gains tax.

You buy a house, and live in it for two years. That qualifies it as a primary residence. Meanwhile you let out your old house (where you stayed before for at least two years), for say two years, and you sell this old house within five years of shifting to your new home, which becomes your primary home in reality and then sell the old house, you would not have to pay the capital gains tax. Let us be clear. You stay in a house for 2 years, it becomes your primary residence. You move into another house,(now your primary residence after two years) and let out this old house for say another 2 years. As long as you sell the old house within 5 years of moving out, there is no capital gains tax to be paid. Read this very carefully.

One more way that provides you exemption from capital gains tax is that the sum for which you sold your real estate should be reinvested by purchasing another piece of real estate. This has to be done within two years of your selling the real estate you had earlier. In other words, the tax authorities want you to reinvest the money you made from real estate into another real estate property within two years of the sale of the real estate. Read this again please carefully.

Please do consult with a tax consultant. This article cannot be construed as a genuine construction of the law relating to real estate tax laws.

Abhishek Agarwal