Here’s How to Avoid the Capital Gains Tax on Your Home Sale

4. Sell your house before filing for divorce

Joint filers have a larger threshold for tax-free capital gains, $500,000 of exempt gains, as opposed to $250,000 for single filers. So, if you are going through a divorce, sell the house before your split’s official to avoid paying capital gains.

Work with a tax professional who specializes in divorce and can act as a neutral third party in coordination with your real estate agent to keep you and your spouse’s financial best interests top of mind.

5. Plan to sell before your gain exceeds the exemption

If your local real estate market skyrockets, your home’s value will go up, up, and away in line with other properties in your area. If that applies to you, keeping track of your adjusted cost basis can help reduce your capital gains. Here’s the simple formula to use:

Original cost of asset

plus (+)

Improvements to asset

plus (+)

Repair of damages to asset

minus (-)

Depreciation to asset

minus (-)

Deducted casualty loss to asset

equals (=)

Adjusted basis of asset

That adjusted basis is your capital gains number. As soon as that number starts inching up close to or beyond the tax-free threshold for your filing status, you’ll have to pay taxes on your profit. So, plan your moves strategically to avoid a large, taxable gain.

6. Offset capital gains with capital losses

Offsetting capital gains with capital losses, also called tax-loss harvesting, is a savvy strategy to reduce your overall tax liability when selling a property. 

Here’s how it works: if you’ve sold other investments, such as stocks or mutual funds, at a loss during the same tax year, you can use those losses to offset the taxable capital gain from your property sale. 

For example, if your property sale resulted in a $50,000 gain but you have $10,000 in investment losses, you only pay taxes on $40,000. This strategy can be applied to short-term or long-term gains, depending on the type of loss incurred. If your losses exceed your gains, you can even offset up to $3,000 of regular income annually, carrying over excess losses to future years.

7. See if you qualify due to an unexpected move

Homeowners who don’t meet the full two-year residency requirement may still qualify for a partial capital gains tax exclusion in certain situations. This can apply if you need to move because of a job change, like starting a new job, getting transferred, or moving closer to your workplace. 

“If something comes up, you get a new job in a new city, and you’ve only owned your home for a year and a half, you can still exclude a portion of your gain if you meet the qualifications to do that,” Rigney says.

He explains further that the following situations can help you reduce your capital gains tax if you sell your home and you fall outside of the general exclusion guidelines:

• You have to sell your home for health reasons.
• You got a new job in a different location.
• You unexpectedly have kids, and your house isn’t big enough.