Capital Gains tax

How to (legally) avoid Capital Gains tax on your US property

When it comes to think about Capital Gains tax on your US property there are a few things to consider. The first nice point is that if your profit from the sale is less than $250,000 then you can exclude it from taxable income (if married this is $500,000).

In order for this exclusion to apply there are some terms and conditions attached (as one would expect from the IRS).

The principle one is the two out of five rule.

This states you must have been resident in your home for a minimum of 2 of the last 5 years before the sale was completed. It appears the 2 years do not have to be consecutive. So, it can be rented for an in between period. It seems these 2 years are the main identifying fact in saying this was your principal residence.

Living in the home for less than 2 years may not automatically exclude the gain completely but you may be able to exclude a portion of it.

There are another couple of things which may have an impact on the calculating of profit from your sale. For example if your employer requires you to move to a new location. Also, if you are selling your house for health reasons. In the latter you need to document these reasons with a letter from your physician.

This, too, allows you to live in the home for less than two years. You don’t have to file the letter with your tax return, but keep it with your personal records just in case the IRS wants further information.

In the same way you need to document any unforeseen circumstances. Circumstances that might force you to sell your home before you’ve lived there the requisite period of time. This may include acts of terrorism, war, death, divorce etc.

One last point to note regarding Capital Gains tax on your US property is this: when calculating the cost of your home be sure to include costs you incurred in the purchase, such escrow fees and real estate agent commissions. Many people omit this and only include the actual purchase price of the house.

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