Yes, it is possible to sell an investment property and defer or eliminate capital gains taxes, primarily by using a 1031 exchange to swap for a like-kind property. Other strategies include converting the rental into a primary residence, investing in Opportunity Zones, or offsetting gains with investment losses.
How to avoid paying capital gains taxes on the sale of rental property
When you sell a rental or investment property, the capital gain is fully subject to tax at the applicable inclusion rate (50% or 66.67% for gains over $250,000 after June 25, 2024). You can deduct eligible expenses, such as capital improvements, from your gain.
To correctly arrive at your net capital gain or loss, capital gains and losses are classified as long-term or short-term. Generally, if you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
The "6-year rule" for investment property, primarily an Australian tax concept (ATO), lets you rent out your former main home for up to six years while still potentially claiming the main residence exemption (CGT-free) on it, provided you lived there first, don't claim another property as your main residence for that period, and either move back in or sell within the timeframe. The clock resets if you move back in for a significant time (e.g., 6+ months) and then rent it out again, but you can only have one main residence exemption at a time.
The "3-3-3 rule" in real estate isn't a single guideline but refers to different strategies: for buyers, it's about financial readiness (3 months savings, 3 months reserves, 3 property comparisons) or a financial affordability check (30% income, 30% down, 3x income); for agents, it's a marketing habit (call 3, note 3, share 3) or prospecting (talking to everyone within 3 feet). There's also a developer rule (1/3 land, 1/3 build, 1/3 profit), though it's considered outdated by some.
You can deduct a wide range of qualified expenses, such as:
The 20% rule for capital gains refers to the highest federal tax rate for long-term capital gains, applying to higher income brackets when you sell investments (stocks, real estate) held for over a year, with lower rates of 0% and 15% for lower incomes, and even higher rates for special assets like collectibles. This rate kicks in for single filers earning over approximately $492,300 (2024) or $533,401 (2025), and higher for joint filers, making holding assets over a year a key tax strategy.
On a $100,000 capital gain, you'll likely pay 15% for long-term gains, resulting in about $15,000 in federal tax (plus potential state tax), but it could be 0% or 20% depending on your total taxable income and filing status, while short-term gains are taxed as ordinary income (potentially 22-24%).
Single filers can exclude up to $250,000 in gains from the sale of a primary home from taxation. That amount doubles to $500,000 for married couples who file a joint return. If you like your rental property enough to live in it, you could convert it to a primary residence to avoid capital gains tax.
Another option that some property investors end up considering, for various reasons, is turning their investment property into their principal residence while still renting out a portion of the property. This might be the case if you have an extra room and you need to generate some extra income.
There isn't a single "one-time" capital gains exemption, but the most common exemption allows you to exclude up to $250,000 (single) or $500,000 (married filing jointly) of profit from the sale of your primary residence, which can be used multiple times as long as you meet ownership and use tests (lived in it 2 of the last 5 years) and haven't used the exclusion in the past two years. Other options exist, like 1031 exchanges for investment properties or Charitable Remainder Trusts, but they have different rules.
Key takeaways. Selling your house may be the right option if you need the proceeds to purchase your next home or you plan to move permanently. Renting out your house may be the right option if you're planning to live in your home again, have a low mortgage rate, or are looking for more income.
How To Minimize Capital Gains Tax on Rental Properties
It allowed sellers to claim CGT exemption for the final 36 months of ownership, even if they had moved out. However, this was reduced to 18 months in 2014 and further to 9 months in 2020, which remains the rule today. This general law is in place as it prevents short-term transaction benefits concerning taxation.
Capital Gains Tax (CGT) is paid to HMRC on the sale of an asset that has made a profit. So, if you have a second home that you are looking to sell, how can you avoid CGT? Well, in truth you can't avoid paying CGT if the property has increased in value. But with expert help, you may be able to lower your final CGT bill.
To qualify for 0% capital gains tax, you must have long-term capital gains (assets held over a year) and your taxable income (after deductions) must fall below specific IRS thresholds, which change annually but are roughly <$48,350 for single filers and <$96,700 for married filing jointly for the 2025 tax year, allowing for higher total income when combined with deductions like the standard deduction. The key is keeping your adjusted gross income (AGI) low enough so that after subtracting deductions, your taxable income remains within these limits.
The "6-year rule" for Capital Gains Tax (CGT) in Australia allows you to treat a former main residence as tax-exempt for up to six years after you move out, even if you rent it out, enabling you to avoid CGT on any growth during that period. You qualify by moving out, choosing to treat it as your main home for tax, and can reset the rule by moving back in. If you rent it out for longer than six years, only the portion of the gain after the six-year mark becomes taxable.
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.