How to avoid capital gains on the sale of real estate
If you sell your home, you may exclude up to $250,000 of your capital gain from tax. For married couples filing jointly, the exclusion is $500,000. Also, unmarried people who jointly own a home and separately meet the tests described below can each exclude up to $250,000. For other property, you may use a 1031 exchange. If you sell rental or investment property, you can avoid capital gains and depreciation recapture taxes by rolling the proceeds of your sale into a similar type of investment within 180 days. This like-kind exchange is called a 1031 exchange after the relevant section of the tax code.
Attorney Tom Olsen: Stephen, you're on News 96.5. Go ahead.
Stephen: Yes. My question was, I have several pieces of property; one, I live in and then I have two rentals. I want to sell and invest either on an empty lot I've already owned or on a new piece of property somewhere in Tennessee. My concern was, how do I do this without losing so much money to taxes and so forth? Because when I bought the properties, I bought them pretty cheap and now they're worth quite a bit of money.
Attorney Tom Olsen: Stephen, are you married or single?
Stephen: I'm single.
Attorney Tom Olsen: Stephen, as far as the sale of your home is concerned, you can avoid capital gains on up to $250,000 of profit. Hopefully, your home is not going to be an issue for you. Stephen, as far as your other-
Stephen: No. The home that I live in, I owe about $126 on it. I could probably sell it for 280. The property that I own clear out the other rental, it's probably worth about 140 and I paid about 70 for it. The other property, I inherited it. When I inherited it, it was only worth about $5,000. Between the two lots that I have that I inherited, they're probably worth about $350,000 and 400,000-
Attorney Tom Olsen: Stephen, I get it. We talked about avoiding capital gains on the sale of your home only up to $250,000 in profit. Otherwise, when you sell those lots, you're going to pay long-term capital gains taxes which I think are 15%. However, I think that there still is available to you, what they call a like-kind exchange. I don't see people using it anymore like they used to but I think a like-kind exchange is still available to you, Stephen.
What would happen is you'd sell those two rental properties and invest it in another property up in Tennessee, if you wanted to. It does not avoid the capital gains taxes, it just delays it to another day when you sell those properties up there. If that's of interest to you, check it out. It'd be a like-kind exchange, Stephen.