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Why Your Home May Be Your Best Tax Friend

So have you thought recently about selling your home?

If so, you might be selling at a good time.  The Case-Shiller US National Home Price Index tells us that the average price of homes across the country has gone up about 56 percent since its most recent low level back in February of 2012.  For some people in certain housing markets, that adds up to a lot of gain, especially if they’ve owned their primary home for the past seven years or more.

But you might also be concerned that you’ll have to pay a bunch of taxes when you sell because your home has gone up so much in value.  Well, there may be some good news for you.  You may be able to keep most – if not all – of the money you get from the sale of your home.

This is because of Section 121 of the Tax Code. This allows you to exclude up to $250,000 of capital gain from the sale of your home, or up to $500,000 of that gain if you file a joint return with your spouse.

Of course, like everything else in taxes, you have to follow some rules and meet certain standards.

To qualify, it must be your primary residence – so it can’t be an investment or vacation property.  You also must have owned and occupied the home as your primary residence for at least two out of the last five years (or, more accurately, 24 months out of the last 60 months) before you sell it.  That’s known as the “use test” and the “ownership test.”  In some cases, you can get a portion of the gain tax free if you don’t meet that 24-month rule, but those are exceptions.  And by the way – the two years of residency and two years of ownership don’t have to be concurrent.  Maybe you rented it from the previous owner for a couple of years before buying it.  If so, that can still work.

And you can only use this exclusion on one home in any 24 month period of time.  As long as you haven’t used this exclusion on another home within two years prior to sale, you may qualify.

Again, a married couple can qualify for an exclusion of up to $500,000 on one home.  In order to do that, you have to show that all of the following are true:

  • You’re married and file a joint return for the year of sale
  • Either you or your spouse meets the ownership test
  • Both you and your spouse meet the use test, and
  • During the 2-year period prior to sale, neither of you excluded gain from the sale of another primary residence

Now remember, just because you can exclude some or all of the gain on the sale doesn’t mean you don’t have to account for it on your tax return.  If your real estate closing agent issued a form 1099S to you, then you’ll need to show the IRS on your tax return why you’re excluding that amount.  It’s kind of a hassle, but you’ll need to do it.  So it may save you some time if you can prove to your agent – with documentation – that you don’t owe taxes on the gain, so they don’t send you a 1099S.

Either way, this is one of the best tax breaks out there, so if you qualify, be sure to take advantage.  If you need help in figuring it all out, just give us a call, and we’ll get it done!

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Rick Plum is a registered representative of, and offers securities through, Lucia Securities, LLC, a registered broker/dealer, member FINRA/SIPC. Advisory services offered through Lucia Capital Group, a registered investment advisor, and an affiliate of Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.

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