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Be Content With the Existing Tax Breaks
Question: I bought my home many years ago for about $55,000. Today, it is worth more than $450,000 because it is in a high-demand neighborhood. If I sell, I will owe a huge capital gain tax. Is there any way to avoid paying tax on my profit exceeding $250,000 (I am single, never married)?
Answer: Many sellers would love to have your "problem" of a $345,000 capital gain with a $250,000 principal residence exemption and only a $95,000 taxable long-term capital gain. With the federal long-term capital gains tax rate of just 20%, plus any state taxes, you are in an enviable position.
The only way to avoid tax on that $95,000 profit exceeding your $250,000 home-sale exemption would be to:
(a) convert your home to a rental property,
(b) make a Starker delayed tax-deferred exchange under Internal Revenue Code 1031(a)(3),
(c) have the proceeds held in trust beyond your constructive receipt and
(d) use the money to acquire a qualifying rental property of equal or greater cost.
Do you want to go through all that hassle just to save capital gains tax on $95,000? I don't think so. Pay the tax and be happy. For more details, please consult your tax advisor. * * *