Can You Avoid Capital Gains by Buying Another Home?

When you sell property for more than you paid for it, you may have to pay capital gains tax.

However, some situations could potentially result in you paying very little or even nothing at all in taxes, depending on the sale and property type.

If this is something you’re considering, it could be worth speaking with a financial advisor.

A fiduciary financial advisor can help you assess the tax implications of selling a home or investment property and buying another, as well as help you determine how a home purchase or sale could fit into your overall financial plan.

Consulting a fiduciary financial advisor can be a great first step to helping make sure you’re on track to meet your financial goals. That's why we created a free tool to help match you with up to three financial advisors.

Click here to take SmartAsset’s free quiz and get matched with vetted fiduciary advisors in just a few minutes, each obligated to work in your best interest.

Research suggests people who work with a financial advisor could end up with about 15% more money to spend in retirement.¹

A 2022 Northwestern Mutual study found that 62% of U.S. adults admit their financial planning needs improvement. However, only 35% of Americans work with a financial advisor.²

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How Does Capital Gains Tax Work for a Home Sale?

When you sell your home, the IRS allows one major form of capital gains tax break: The home sale exclusion.

This could allow you to deduct a significant amount of the profit from your home sale to help minimize or potentially avoid capital gains taxes. There are two ways to approach this: one for homeowners and one for investment property owners

Section 121: The Home Sale Exclusion (for homeowners)

This allows taxpayers to potentially exclude capital gains from the sale of their primary residence.

In 2024, this exclusion allows individual taxpayers to exclude up to $250,000 from the sale of their primary home ($500,000 for joint taxpayers).

Section 1031: The Like-Kind Exchange (for investment property owners)

This allows taxpayers to potentially defer paying capital gains tax on an investment property sale by using the proceeds to buy another similar property.

Taxable capital gains may only apply to the amount made on a sale. This means you could hypothetically first deduct the price you paid for the home, then remove any tax-deductible improvements or expenses.

Then, you deduct the home sale exclusion. Whatever is left is the amount on which you owe taxes.

To see if this strategy could work for your financial situation, it could be a good idea to speak with a financial advisor. This free quiz can match you with up to three vetted advisors who serve your area in just a few minutes.

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How Like-Kind Exchanges Can Help Avoid Capital Gains Tax

Generally, when sellers make this type of exchange, they are not required to recognize a gain or loss under Internal Revenue Code Section 1031.

Like-kind exchanges must meet three general requirements:

• This property must be held as an investment asset. It cannot be a home for personal use. Generally, if you ever stay at this property it will probably not count for a 1031-like-kind exchange.
• This property must generate income through rental or other uses. You cannot hold the property just as an investment for a later sale.
• The property you buy must be of the same “character and class” as the property sold. This is generally a low requirement, as the IRS considers most real estate fungible for this purpose.

You do not need to make a direct swap in a like-kind exchange. Instead, once you sell your first investment property, you can put the proceeds into escrow and then have 180 days to find and purchase another similar piece of property. This new purchase must also generate income through rentals or other use, and also be exclusively for business purposes.

You could then potentially use your escrowed funds to buy this property. If you do so, the IRS may allow you to consider this an exchange and you may not have to pay taxes on the proceeds from your original sale.

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How to Get Help Minimizing Capital Gains Tax

If you’re looking for ways to decrease your tax burden on home or investment property sale, we recommend speaking with a financial advisor. It’s possible they can help you understand your options and look for ways to save money on your tax bill.

Consulting a fiduciary financial advisor could help you determine a plan that factors your assets and taxes into your overall retirement goals. Fiduciaries are obligated by law to act in your best interest and any potential conflicts of interest must be disclosed.

Yet knowing how to find a vetted fiduciary advisor is, for many, the most confusing task of all. Common Google searches related to the topic reveal a desperate search for direction.

"Fiduciary financial advisors near me,” "best fiduciary financial advisor,” and "financial investment advisors near me” are searched hundreds of times per day.

Finding a fiduciary shouldn't be that hard. Thankfully, now it isn't.

SmartAsset’s free matching quiz SmartAsset’s free matching tool makes it easier to find a vetted advisor so you can make an informed decision and choose one you feel best suits your financial needs. All advisors on the matching platform have been vetted through SmartAsset’s proprietary due diligence process.

The quiz takes just a few minutes, and in many cases, you can be connected instantly with an advisor to have an introductory call.

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The information contained in this article is general and not specific to any individual's situation. The SmartAsset quiz matches you with up to 3 financial advisors to which you can compare and decide which to work with. You can consult a financial advisor about your inherited property and taxes. The SmartAsset quiz can't make a determination regarding your property and taxes.
This is not an offer to buy or sell any security or interest. All investing involves risk, including loss of principal. Working with an adviser may come with potential downsides such as payment of fees (which will reduce returns). There are no guarantees that working with an adviser will yield positive returns. The existence of a fiduciary duty does not prevent the rise of potential conflicts of interest.

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SmartAsset.com is not intended to provide legal advice, tax advice, accounting advice or financial advice (Other than referring users to third party advisers registered or chartered as fiduciaries ("Adviser(s)") with a regulatory body in the United States). SmartAsset is not a financial planner, broker or tax adviser. The Service is intended only to assist you in your understanding of financial organization and decision-making and is broad in scope. Your personal financial situation is unique, and any information and investing strategies obtained through SmartAsset.com may not be appropriate for your situation. Accordingly, before making any final decisions or implementing any financial strategy, you should consider obtaining additional information and advice from your accountant or other financial advisers who are fully aware of your individual circumstances.

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Sources:

1. "Journal of Retirement Study" (Winter 2020). The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of your future results. Please follow the link to see the methodologies employed in the Journal of Retirement study.
2. "Planning and Progress", Northwestern Mutual (2022)