Capital Gains Tax Avoidance

[Francisco Avellan]

Hi everyone,

I bought my primary residence 8 months ago. I intended to live here for 2 years and then keep it as a rental property. The issue is that a train track runs behind it and the vibration is horrible (literally feels like an earthquake day and night). I do not think it will work as a rental property because of this, so I am thinking about selling it. My estimated profit on the sale would be around 100k. 

Since I´ve lived here for less than 2 years, would there be any way to avoid paying the capital gains tax? Thank you all!

[Account Closed]

In the United States, the Internal Revenue Service (IRS) provides a tax exclusion for capital gains on the sale of a primary residence under certain conditions. The exclusion is commonly referred to as the "Home Sale Exclusion" or "Section 121 Exclusion."

To qualify for the full exclusion, you generally need to meet the following criteria:

1. Ownership and Use Test: You must have owned the home and used it as your primary residence for at least two out of the five years preceding the sale. The ownership and use periods do not need to be consecutive.
2. Exceptions to the Two-Year Rule:
   • If you're selling due to a change in employment, health reasons, or other unforeseen circumstances, you may be eligible for a reduced exclusion.
   • In cases of unforeseen circumstances, the IRS may prorate the exclusion based on the time you spent in the home.

In your situation, if you sell the property before meeting the two-year ownership and use requirement, you may not qualify for the full exclusion. However, you should explore whether any exceptions apply to your case, such as unforeseen circumstances.

Unforeseen circumstances, as defined by the IRS, might include changes in employment, health issues, or other unforeseen events. If your situation qualifies as an unforeseen circumstance, you might be eligible for a prorated exclusion based on the time you spent in the home.

It's crucial to consult with a tax professional or accountant to get advice tailored to your specific situation. Tax laws can be complex, subject to change, and interpretation may vary based on individual circumstances. Always ensure you have the most up-to-date and accurate information when making decisions about your taxes.