Using capital gains exclusions is a useful way to acquire wealth through real estate.
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In the state of California, if you own a house for less than 24 months, you’ll be hit with a short-term capital gains tax and all of the capital appreciation you’ve accrued will be taxed for as much as 34% or higher based on your tax bracket.
Because of that rule, it’s very important that you understand how to take advantage of capital gains exclusions (or IRS Code: Section 121).
First, you must understand the ownership principle of capital gains exclusions, which states that you must have owned the house as a primary residence for at least two of the last five years you’ve owned the property.
This is one of the secrets of how high net-worth individuals accumulate a lot of cash using real estate as a vehicle.
The second thing to consider is the frequency of using capital gains exclusions. This is something you can do every two years. For example, if you buy a house, wait 24 months, and then sell it for—say—$400,000, you can get an exclusion for that entire sum if you’re a married couple. Remember—married couples can exclude up to $500,000, while single persons can only exclude up to $250,000.
You can then defer your taxes, roll that into your next investment property, and start the process all over again.
If you have any questions about this strategy or any other real estate topic, please don’t hesitate to reach out to me. I’d be happy to assist you.
