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Capital Gains Tax Relief


Capital Gains Tax Relief

Roxanna Guinan
by Roxanna Guinan, Contributor

The average American selling a home this year probably doesn’t have to worry about a capital gains tax.  The Federal government provides a measure or capital gains tax relief by allowing an individual to exclude up to $250,000 ($500,000 for a married couple filing jointly) of capital gains on the sale of real property if the owner used it as primary residence for two of the five years before the date of sale.

The two years of residency do not have to be continuous to qualify for this capital gains tax help. An individual/married couple may meet the ownership and use tests during non-consecutive two year periods. However, both tests must be satisfied during the 5-year period ending on the date of the sale. There are allowances and exceptions for military service, disability, partial residence and other reasons.

Utilizing other sales methods and/or deferral techniques can yield capital gains tax relief.  The IRS allows the following types of transactions:

  • Deferred Sales Trust ― Allows the seller of property to defer capital gains tax due at the time of sale over a period of time
  • 1031 Exchange ― Defer capital gains tax by exchanging for "like-kind" property (capital gains can be deferred forever by buying a replacement real estate by a business, but not for personal real estate)
  • Structured Sale Annuity (a.k.a. Ensured Installment Sale) ― Defer and reduce capital gains tax while gaining safety and a stream of guaranteed income
  • Charitable Trust ― Defer and reduce capital gains tax by giving equity to a charity
  • Self-Directed Installment Sale (SDIS) ― Allows for the deferral of capital gains tax while removing the risks from buyer default under a traditional installment sale

Some states and local governments also offer capital gains tax relief for senior citizens.  In addition, due to the current stalled state of the economy, many politicians are pushing for the Bush Administration’s capital gains tax relief extension of 2006 to be extended beyond 2010.