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Should I buy a house this year to avoid capital gains taxes?

October 29, 2012: 6:30 AM ET

I sold my house in April for a job relocation. Now I'm renting while looking for a new house. Will I have any tax penalties if I do not buy a new house this year? — Mark S.

Unless you turned an extraordinary profit when you sold your home, you probably won't owe any taxes on the sale, thanks to a generous IRS tax break on home sales. "A lot of people are still confused about this," says Ted Sarenski, CEO of Syracuse, N.Y.-based Blue Ocean Capital. "Under the old rules, you needed to replace your home within two years to avoid capital gains taxes—and you could only do that once in a lifetime."

Since the Taxpayer Relief Act of 1997 became law, however, individuals have been allowed to make a $250,000 profit on the sale of their primary home (or $500,000 if you're married and filing a joint return) without paying capital gains taxes — regardless of whether they later buy a new house. What's more, there's no limit to the number of times you can use the home-sale gains exclusion. There are a few rules you need to follow, however, including a requirement that you must have lived in the home for at least two of the five years prior to the date of sale.

— Marc Mewshaw

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