How can I avoid capital gains tax on primary residence in the USA?
Asked by: Miss Maryam Collier III | Last update: February 19, 2026Score: 4.3/5 (22 votes)
You can avoid or significantly reduce capital gains tax on your primary home sale by qualifying for the IRS Section 121 exclusion, allowing singles to exclude up to $250,000 and married couples up to $500,000 in profit, provided you've owned and lived in the home as your main residence for at least two of the five years before the sale. You can also boost your exclusion by tracking major home improvements (like new roofs or kitchens) to increase your cost basis, which lowers your taxable profit.
How to avoid capital gains on a primary residence?
To avoid capital gains on your primary home, use the IRS Section 121 exclusion, allowing single filers to exclude up to $250,000 and married couples up to $500,000 of profit if you've owned and lived in the home as your main residence for at least two of the five years before the sale, and haven't used the exclusion in the past two years; also, increase your home's cost basis by adding capital improvements and deducting selling costs to reduce your taxable gain.
How long can you live in a house without paying capital gains?
After this conversion, the property can be sold and the capital gains excluded up to the allowable amount, as long as the property has been owned and used as a principal residence for at least two years during the five-year period ending on the date of the sale of the residence.
What is a simple trick for avoiding capital gains tax?
A simple trick to avoid capital gains tax is to hold investments for over a year to qualify for lower long-term rates, or even better, donate appreciated assets to charity, which lets you avoid tax on the gain and potentially get a deduction, or use tax-advantaged accounts like a 401(k) to defer taxes until withdrawal. Other methods include offsetting gains with losses (tax-loss harvesting), using Opportunity Zones, or gifting appreciated assets to beneficiaries in lower tax brackets.
Is there a loophole around capital gains tax?
Yes, there are legal strategies, sometimes called "loopholes," to defer, reduce, or avoid capital gains taxes, including the "step-up in basis" at death, tax-advantaged retirement accounts, 1031 like-kind exchanges for real estate, primary home sale exclusions, and using certain investment vehicles like ETFs, all allowed under current tax law to minimize taxes on appreciated assets, though rules and availability vary.
The Shocking New HMRC Rule That Affects All Homeowners!
Who qualifies for 0% capital gains?
To qualify for 0% capital gains tax, you must have long-term capital gains (assets held over a year) and your total taxable income must fall below specific IRS thresholds, such as under $48,350 for single filers or $96,700 for married filing jointly (for 2025), using deductions to lower your income, allowing you to realize investment profits tax-free in lower-income years.
How to get away without paying capital gains tax?
The simplest way to avoid capital gains tax is to regularly use your capital gains tax allowance (officially known as your annual exempt amount or AEA). How easy this is to do depends on the assets you are selling.
How much capital gains do I pay on $100,000?
On a $100,000 capital gain, you'll likely pay 15% for long-term gains (held over a year) if you're in a typical income bracket, totaling $15,000; however, if it's a short-term gain (held a year or less), it's taxed as regular income, potentially 22% or higher, making it $22,000 or more, depending on your total income and filing status. The exact tax depends heavily on your filing status (Single, Married Filing Jointly) and other taxable income.
What is the one-time capital gains exemption?
The primary "one-time" capital gains exemption in the U.S. allows single filers to exclude up to $250,000 (or $500,000 for married couples filing jointly) of profit from selling their main home, provided they've owned and lived in it for at least two of the last five years before the sale. While it's often called a one-time exclusion, you can use it multiple times, but you must wait two years before claiming it again on another property.
How do rich people avoid capital gains tax?
Billionaires often employ the “buy, borrow, die” strategy to avoid income and capital gains taxes. First, they acquire appreciating assets like stocks or real estate. Instead of selling these assets when they need cash (which would trigger capital gains tax), they borrow against them at favorable interest rates.
Will Trump get rid of capital gains tax?
Does the Trump Tax Plan Affect Capital Gains Tax Rates? Trump's tax law leaves existing capital gains tax rates and income tax brackets unchanged. Capital gains remain a key consideration for investors, especially those with taxable brokerage accounts, real estate holdings or long-term investment portfolios.
What happens if I sell my house and don't buy another?
If you sell your house and don't buy another, you'll pocket the net proceeds (after paying off the mortgage and selling costs) and can use that money for other housing, like renting, or other life expenses, potentially benefiting from a significant capital gains tax exclusion (up to $250k/$500k) if you meet residency rules, but you'll need a new living situation (renting, family) and must manage moving costs and potential taxes on profits above the exclusion.
What is the main residence exemption?
You can choose to treat the property as your main residence for the period you lived in it and the first 6 years you rented it out, but you can't claim the exemption for another property for the same period. CGT must be applied for the remaining time you rented out the property until its sale.
Can I deduct home improvements to avoid capital gains?
Capital improvements: Improvements that add value to your home or prolong its useful life can reduce the amount of capital gains tax you owe when you sell your home, but won't be immediately deductible.
What is the 20% rule for capital gains?
The 20% capital gains rule is the highest federal tax rate for long-term capital gains (assets held over a year), applying when your taxable income falls into the highest tax brackets, above thresholds set by the IRS (e.g., over $545,500 for single filers in 2026). While 0%, 15%, and 20% are standard long-term rates, higher rates (25% or 28%) can apply to specific assets like real estate with depreciation or collectibles.
Can I use a trust to avoid capital gains?
A Living Trust Does Not Eliminate Capital Gains Taxes
Another common myth is that putting a home or investments in a trust removes capital gains tax obligations. However: If you sell an asset while it's in a revocable living trust, you still owe capital gains tax on any profit.
Who qualifies for 0% capital gains tax?
Capital gains tax rates
A capital gains rate of 0% applies if your taxable income is less than or equal to: $48,350 for single and married filing separately; $96,700 for married filing jointly and qualifying surviving spouse; and. $64,750 for head of household.
Can you have two primary residences?
A primary residence, also known as a principal residence, is generally the home that you live in for most of the year. You can only have one primary residence, so you can't live in two homes an equal amount of time and have them both be your primary residence.
What is the 7 year capital gains tax exemption?
7-Year Capital Gains Tax Exemption
If you dispose of land or buildings bought between 7 December 2011 and 31 December 2014, and held them for at least 4 years, you may be eligible for partial or full relief: Held for more than 7 years: No CGT for the first 7 years of ownership.
How can I legally avoid capital gains tax?
A common way to defer or reduce your capital gains taxes is to use tax-advantaged accounts. Retirement accounts such as 401(k) plans, and individual retirement accounts offer tax-deferred investment. You don't pay income or capital gains taxes on assets while they remain in the account.
What is the 6 year rule for capital gains?
The "6-year rule" for Capital Gains Tax (CGT) in Australia lets you treat a former main residence as if it's still your primary home for up to six years after you move out and start renting it out, potentially making any capital gain during that period tax-free. You must have lived in the property initially, can only claim it for one property at a time, and the exemption resets if you move back in, allowing for multiple uses. It's a common strategy for "rentvesters" or those temporarily relocating for work, but requires careful record-keeping.
How do the rich avoid paying capital gains tax?
How Wealthy Households Use a “Buy, Borrow, Die” Strategy to Avoid Taxes on Their Growing Fortunes
- Step 1: Buy Assets. Wealthy family buys stocks, bonds, real estate, art, or other high-value assets. ...
- Step 2: Borrow Against Assets. ...
- Step 3: Die and Pass Assets Tax Free to Heirs.
What is the best tax-free investment?
Here are some common examples of tax-free and tax-efficient investments:
- Municipal bonds (Munis)
- Qualified small business stock (QSBS)
- Indexed universal life insurance.
Can I skip capital gains tax?
Exemption under Section 54EC
Section 54EC provides that you do not have to pay LTCG tax on the sale of any long-term capital assets if the capital gains are invested in the designated government bonds and instruments. The bonds must be purchased within six months following the asset's sale.