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We're closing on our Virginia townhouse in mid-October and we are trying to reduce our capital gains tax on the property. It was a rental for several years and would be a long term capital gain. We haven't lived there for over 10 years and we are not in the military. We are not interested in purchasing another rental property. Are there other ways to reduce the capital gain? For instance, if we take a 2nd mortgage out on that property before closing, can we pay off the loan at closing and avoid paying capital gain? Can we contribute amounts to some kind of retirement annuity to reduce the tax?
ANSWER
The BIDaWIZ Team's Answer:
Unfortunately, a home equity loan doesn't increase your tax basis unless it is used for home improvements. Thus, you wouldn't be able to reduce your capital gains tax that way. We would recommend that you try to reduce your adjusted gross income to $72,500 as married filing jointly by contributing the maximum to a 401(K) or Solo 401(k). If you're self employed it's technically possible to contribute $51,000 annually to a Solo 401(k).
