Capitol gains

[nelsonexe]

We owned the house my brother lived in until his recent death, no profits from the rental were ever gained. Now we will be selling that home, by paying down the principal on our primary home can we avoid capitol gains or at least reduce it?

[NCperson]

from what I understand, you owned a home that you permitted your brother to live in.  You did not charge him rent.  

This is then a 2nd home of yours.  

Determinging capital gains has nothing to do with the mortgage.  So paying down the mortgage on your princple home (or the home you are about to sell) won't change anything.

The capital gains on the house you are selling is:

1) Selling price - sales expenses (the commission is normally the biggest expense)

2) what you originally paid for the home PLUS any improvements 

1) - 2) is the gain

[tagteam]

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@nelsonexe wrote:

.....no profits from the rental were ever gained.....

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@NCperson's post is correct, but the above-quoted statement requires clarification.

Was the house a rental prior to the time your brother lived in the house? If not, was your brother paying rent and, if so, was your brother paying rent at the fair rental value? Did you ever report any rental income and/or expenses on your income tax return (Schedule E or otherwise)?

I am sorry for your loss.

[Hal_Al]

Q.  Can we avoid capitol gains or at least reduce it?

A. No. 

As others have said, you are selling a "2nd home". The gain on the sale is a taxable long term capital gain (LTCG), subject to long term capital gains rates. Depending on how much total income you have LTCG are partially taxed at 0%, 15%, 20% and/or 23.8%. 

[Opus 17]

The sale of property, even a home, is a standalone transaction.  It is taxed according to its own rules, and the taxes can't be changed by what you do with the money afterwards.  (There is an exception if you are exchanging one business property for another, but that does not seem to be the case here.)

Assuming this is your second home, that was lived in by a family member without charging rent (or charging less than market rent), then you will have to pay the capital gains tax.  Sorry. You can reduce your tax by documenting any adjustments to your basis, such as improvements and certain closing costs, as described in publication 523.

https://www.irs.gov/forms-pubs/about-publication-523