Capital gains tax can take away a large part of your earnings when you sell a folding home. But believe it or not, there are perfectly legal ways to reduce or even eliminate that tax bill. The time to think about taxes is before you buy the property. You must decide in advance whether to sell the house immediately, whether to keep the property for a year, or to live in it for a couple of years. Your tax obligations are different for each scenario, so make sure you understand your options and their consequences.

Here’s a quick overview of four important tax laws that you can use to minimize your taxes and increase your profits when moving houses.

Two-year residency rule

Live in the home with your partner for two years or more, and you don’t have to pay capital gains taxes up to $ 500,000 of earnings. Or if you’re single and living in the home for at least two years, you can keep up to $ 250,000 of earnings, tax-free. This rule, which came into effect in 1997, has made home swapping more profitable than ever. You can take advantage of the tax break every time you sell a home, as long as you’ve lived in it for two years.

Exemption from the two-year residency rule

There is an exemption to the two-year rule that not many people know about. If you sell your home in less than two years because you move more than 50 miles due to relocation from work, health reasons, or unforeseen circumstances, you will pay a reduced capital gains tax. The amount will be prorated based on how long you have owned the property. This exemption could save you thousands of dollars.

Long-term gains versus short-term gains

Own the home for at least a year and a day, and you’ll pay substantially less taxes than you would if you owned the home for a year or less. Long-term earnings (more than one year) are taxed at a lower rate than short-term earnings (one year or less). The tax rate for long-term earnings will vary, so consult your accountant for more information. Note that your property begins the day you take possession of the property and ends the day you actually sell the property. To make sure you’ve owned the home for at least 366 days, put the property up for sale ten months after you buy it and demand a 60-day warranty period. Check your calendar – one day makes a difference here.

Tax deferral

Take advantage of the federal tax-deferred 1033 exchange. Under the program, you can sell a home and defer all taxes by transferring all proceeds from the sale to the purchase of a similar property of equal or greater value. You can repeatedly buy and sell increasingly expensive properties, while deferring capital gains tax. This rule has very specific guidelines and times that you must follow to take advantage of its benefits.

Tax laws are complicated and change often, so this is an area where you need the expertise of your accountant (who must specialize in real estate tax law). Always check with him or her before making decisions about buying and selling flip properties.