How to Avoid Capital Gains

Question

Hello,

My partner is planning on selling her condo, however, I am in the midst of purchasing my first property and we plan on living together. So, where can she move her money after selling in order to avoid capital gains tax?

Manny Vasquez · Answer

If your partner has lived in the property for at least 2 years during the past 5 years, she doesn't have to pay any capital gains if the proceeds are $250K or less.  If she made say, $275K from the sale of her condo, then there is no capital gains tax on the first $250K, but she will pay capital gains on the remaining $25K.

If the condo is an investment property, she can avoid paying capital gains if she does a "1031 Exchange".  In a nuthsell, she would be taking the proceeds of the sale and putting all of the proceeds into another investment property.

David M. · Answer

@Jacob Wohlgemuth

After two years of using it as her primary then she is eligble for the sec121 exclusion.  So, wait to close after May6th.  Being single, she is eligible to exclude up to $250k of capital gain on her primary residence as mentioned.

1031 exchanges are only available for investment properties.  Since that is her primary, its not eligble.

You mentioned in your OP about "moving" money to avoid capital gain...  Many have this notion that by "reinvesting" the proceeds that somehow avoids capital gains.  Unfortunately, it doesn't work like that.  If you realize profit, sales price - purchase (and some adjustments for closing costs and capital improvements), you have taxable income.  Just because you "spend" the money on another property doesn't change the taxable profit, in short.

Good luck.

Josh St Laurent · Answer

@Jacob WohlgemuthHey Jacob, to @Manny Vasquez's point, whether she qualifies for the Primary Residence Exclusion or not will be the primary factor on your tax question.  Best best-case scenario she has lived there at least 2 of the last 5 years (It was her primary residence) and has 250k or less of gains.  Then she has nothing to worry about from a capital gains standpoint.  If her gains are over 250k OR it was never her primary residence then you'll need to get creative.

Manny pointed out that you could do a 1031 exchange.  If you were wanting another property within the next 6 months after selling her condo this could be a good option.  Just be cognizant of the timelines and start planning now, you must identify the replacement property within 45 days.  I'm by no means an expert on 1031 exchanges but you can find experts on BiggerPockets if you end up needing them.

There are a few other things that come to mind, I'll put them in order of most to least applicable based on the situation you've laid out.

Offset any capital gains with capital losses - Maybe she owns some stock to use an easy example, and it hasn't done well.  She could sell the stock and use those losses to offset some (or all) of her gains.

Invest in opportunity zones - Likely a qualified opportunity fund - This could defer and potentially reduce the capital gains but there will be hoops to jump through and rules to follow

Hold the note when selling the property - Spread out the capital gains over a predetermined mortgage period.  (You act as the bank)

Charitable giving to offset gains

Transfer the home into a trust (Like a CRT for example) that will avoid capital gains tax and you can have pay you a set income stream until your death and the remaining funds would go to charity.

None of this is or possibly could be advice, I don't have enough info to fully know what is "best" but these are some ideas to think about!

Basit Siddiqi · Answer

Section 121 allows a taxpayer to exclude $250,000 of gain($500,000 if married filing) joint on the sale of a personal residence that was lived in for 2 out of the last 5 years.

Sean Ross · Answer

@Manny Vasquez is correct that she would have to move all of the proceeds into the new property in the case of a 1031 exchange.  I want to also point out that simply moving the proceeds over isn't enough to defer all of the taxes -- the new investment property must also be worth at least as much as the property she sells (after closing costs).

Jacob Wohlgemuth · Answer

@Manny Vasquez @Josh St Laurent Thank you guys for your expertise and leading us in the right direction. Much appreciated

May 6th will be two years of owning the condo as her primary residence. She bought it for 305k and will get around 350k when she sells. In this scenario, if she sells after two years she will not have to pay any capital gains? Or can she sell before two years and still avoid the taxes?

How to Avoid Capital Gains

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