Capital Gains Tax – Escaping is Not as Tough as It Seems To Be

“Capital gains” is one of the most terrified terms for taxpayers. If you’re clear about what capital gains is; capital gains can be defined as the profit you make after selling your valuable assets such as property. According to laws of capital gains tax, you’d need to pay taxes on all the profits you make by selling your assets. Capital gain can be made from property, bonds or stocks. Tax authorities apply tax whenever you make profit however, if you face loss while selling your property, you’ll get tax deduction.

There are certain allowances and exemptions provided by the IRS. Therefore, in some cases, you can avoid paying capital gains tax. If you sold a property, which was your permanent residence for more than three years, then there is no need to pay capital gains tax. If you’ve multiple properties, then it is up to you, which property you’re going to consider as your residential property. If you’re filing a tax jointly with your spouse, you can consider only one permanent residence. However, if you’re legally separated then both of you can consider two residential properties.

In case, one of your properties is your main residence however, for some time you rented it out, or you didn’t use the property as residential home for some other reason then the capital gain will be calculated on the basis of time period you used the property as your residential home. You’ll get specific tax relief, if you consider last three years of the ownership of your main residence while calculating the tax. There are some clauses in the capital gain tax laws that you’d need not to pay tax even you make huge profit by selling your assets. Real estate is one of the areas where it’s not hard to dodge the tax authorities as you get lot of deductions and exemptions.

According to the law, if you’re not married or legally separated and made huge profit by selling your property; you need to pay taxes only if make profit of more than $250,000. Are you married? Then you don’t pay taxes if profit is less than $500,000. This exemption is applicable only on the primary residence sale. Even if you’re making profit of more than $250,000 or $500,000, there is no need to worry as you’d pay tax only on the amount that exceeds these amounts. If you’ve rented out one of your properties and now you’re selling it, you can escape form capital gains tax. Yes, it’s true! You just need to represent that in last five years, you lived in for at least two years. This is the most common tactic used by real estate investors to escape from taxes on capital gains.

In case, you’ve not lived in your property for more than two years, even then you can avoid capital gains tax. The trick is to invest your profits in another property. There are several clauses and tax laws that allow you to save your money especially from capital gains tax. If you’re not sure about this, seeking a professional help is always recommendable.