How to Avoid Capital Gains Taxes on Selling a House

by Neal Frankle, CFP ®

With a few smart moves (literally), you can avoid capital gains taxes on selling a house. That’s good news. But even if you don’t have a gain, I still have good news for you. You don’t have to worry about taxes (but you should still read this post and you’ll see why in a minute).

The laws governing capital gains on home sales changed in 1997.

Prior to that, you had to buy a new home and plow the profits back into another home if you wanted capital gains tax relief. To make it harder, you had to be 55 or older and you could only exclude a maximum of $125,000 of the gain. Many people mistakenly believe that these rules are still in place. But things have loosened up big time and you need to know about it.

If you’re single, you can exclude $250,000 in gain, and if you are married, you can exclude $500,000 when you sell your home. To sweeten the deal, it doesn’t matter how old you are.

Let’s take an example. Say you are married and you bought your home in 1989 for $100,000. Now, it’s worth $700,000 and you’re ready to cash out. You pocket $600,000 and only pay a capital gains tax of 15% on $100,000 – or $15,000. Your total gain is $600,000 but you exclude $500,000…remember? That’s a spicy meatball if you ask me.

There are a few rules, and you can use these to your advantage – especially if you own more than one property.

The Rules:

You can only exclude the $250,000 or $500,000 on your principal residence. Also, you have to own your home and have lived in it for two out of the last five years before you sell it. But remember, there are no age limitations and you can take advantage of this tax break as often as you like (but you do have to wait two years between each transaction).

How do you use this?

Assume you have a residence in Los Angeles and a vacation home in Palm Springs. Sell the residence in LA and pocket the $500,000 gain tax-free. Then, move into your vacation home in the desert. Stay there for two years and then sell it. At that point, you can earn another $500,000 tax-free gain.

Another way to take advantage of this rule (and the fact that real estate prices are low and mortgage rates are cheap) is to simply start buying real estate. Get that five-year clock ticking. Now is a good time to buy a house, my friend.

Of course, you want to buy right. You need to know how much house you can afford and where to buy it. But given the current economics and tax break, I believe you can take this opportunity to create significant wealth for yourself right now.



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{ 4 comments… read them below or add one }

Vernon Groston March 4, 2012 at 9:01 PM

Does the liability for capital gains tax ever go away?? For example, if I sold a house two years ago and didn’t pay CGT, will I have to pay it when I return to live in the UK (I’ve been living abroad for 10+ years).


Neal Frankle March 4, 2012 at 9:27 PM


Where did you sell the house? IN the US or UK? Are you a UK citizen? A citizen of the US? Tell me more about your situation please.

Also, when you incur a tax liability it doesn’t go away just because you do.


Neal Frankle December 31, 2011 at 5:01 PM

NUNZIO! Nice to see you back here sir! I completely agree. Most folks really don’t consider their home appropriately when they consider proper asset allocation. I might be one of them. I don’t consider it much because I have to live somewhere…so I can’t really consider the equity in the value of my life estate. It’s really more a consideration for my legacy…


Nunzio Bruno December 31, 2011 at 3:57 PM

It’s been a while since I’ve traveresed these comments here :) Happy New Year first off! As to the housing points – they can really be valuable planning tools. I see a few things a lot: people either treat their home or property in general as the only asset class in their portfolio or they forget about it all together. You have to consider these tips when you are making adjustments or are thinking about your next investment move – and I’m not even a broker lol. It’s all about taking a holistic look at your portflio and life situation.


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