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How long do you have to buy a house after selling to avoid capital gains tax?
In this article, you’ll learn about:
Let’s dig in.
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Here’s how long you have to buy a house after selling one to avoid capital gains tax:
Understanding how long you have to purchase a new property after selling one is crucial to avoid capital gains tax.
In the U.S., the rules differ between selling a primary residence and an investment property.
The timeframe and conditions for each type of property can determine:
Let’s delve into the specifics of both scenarios.
Read More: How Much Time After Selling A House Do You Have To Buy A House To Avoid The Tax Penalty?
When you sell your primary home, you don’t need to buy another house to avoid capital gains tax.
Let’s say you lived in and owned the house for at least two years in the five-year period before selling.
You can exclude up to $250,000 of the gain if you’re single or $500,000 if married filing jointly.
This exclusion can be used once every two years.
For investment properties, the situation is different.
To defer capital gains tax, you can use a Section 1031 exchange.
Here, you’d need to:
This process allows you to defer paying capital gains tax by rolling the gains into the new property.
In summary, for a primary home, there’s no requirement to buy another house to get the capital gains exclusion.
For an investment property, you have specific time frames (45 days to identify and 180 days to close) using the 1031 exchange to defer the tax.
Read More: Do You Have To Pay Capital Gains If You Reinvest In Another House?
When you sell a house for more than you bought it for, the profit you make is called a “capital gain.”
This profit might be taxed, and that’s called “capital gains tax.”
How are capital gains calculated?
No, you don’t pay capital gains tax right after selling.
Instead, you report the sale and any profit when filing your annual tax return.
The tax itself is due by the regular deadline for that tax year, typically April 15th.
If expecting a significant tax amount, consider making estimated payments beforehand to avoid potential penalties.
Capital gains tax is the tax you pay on profit from selling assets like houses.
While you can’t always avoid it, there are strategies to reduce or defer it:
When it comes to avoiding capital gains:
Simply buying another house does not let you avoid capital gains tax on a sold primary residence.
The key method to exclude profits is the primary residence exclusion.
If you have lived in the home for two of the last five years, it allows you to exclude:
However, for investment properties, a tactic called the 1031 exchange allows you to defer paying capital gains tax.
Here, if you sell an investment property and use the proceeds to buy a similar one, the capital gains tax can be deferred.
When you sell a house and make a profit, here’s how reinvesting into another house affects your capital gains:
For the sale of a primary residence, there’s no requirement to reinvest the money to avoid capital gains tax.
Instead, you can qualify for an exclusion if:
If you meet these criteria:
The money you receive from the sale is yours to use as you wish, whether you:
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