If you are like most American’s you’ll start asking how to reduce your tax liability either the day before or the day after you just sold a property. Which in most cases, is too late. Click here for the 3 most common tax questions when selling a home. If you are buying real estate for long-term gains, then you want to be strategic in how you buy the homes, not how you sell them.
Make Your Primary Home Count
The IRS has been very generous when it comes to your personal home. As of this writing, you are exempt from paying capital gains on a property that you’ve used as your personal home for up to $250,000 as a taxpayer filing as a single person or up to $500,000 as a tax person paying as a married person.
The key word here is “gain”. Roughly speaking the gain is calculated by taking the sales price less the purchase price less any improvements made. So if you are married and you paid $250,000 for the home, you would have to sell the home for well over $750,000 before your are taxed a penny on capital gains taxes. (there may be other taxes you pay such as excise or property taxes) This means, in theory, that if you are married you can add up to $500,000 to your retirement nest egg tax-free.
The best way to buy strategically to make the most of your primary home purchase is to buy a home as early in life as you can. Buy a home in a market that is positioned to grow both economically and by population counts. And purchase the most expensive home you can afford during your income producing years…
Oh-oh, did that last sentence run counter to your favorite financial adviser’s opinion?
I know that there are countless advisers who preach (and for good reason) to buy a modest home and pay it off quickly. And I’m not dismissing that advice. However, if you want to grow a retirement nest egg, any method that helps you do that tax-free is also good advice. What’s important is that you have a plan, and you know the pros and cons of your plan and you stick to your plan.
Buying a home you can’t afford is foolish. What is brilliant? Buying a home you can afford that will
- force you to save by paying the mortgage off over time and
- that will also appreciate well and
- will help you grow your retirement nest egg tax-free
Sell your home if it’s appreciated too much
You lived in your home for a long time. Now you are starting to realize that the value has risen in value and you could be to your peak exemption amount. You may want to sell your home and move up. If you bought a home during the Great Recession for $500,000 and now the city has changed the zoning to higher density and now your home (or rather your lot) is worth $1,000,000. If you sell today, and if you are married, the gain is tax-free. Yahoo!!!
In the above scenario, holding the property longer may not make financial sense. The big boom in appreciation happened because zoning changed, and the future rise in appreciation may likely be slower than the past. And you’ll be taxed on the gain from this point forward.
If instead, you sell and move up to a $1,000,000 home. You’ve simply moved your equity from one property to another and now you’ve reset the clock on your capital gains.
Move down when you retire
There is no point in building tax-free assets if you don’t cash out the benefit. Remember I told you earlier to buy as much home as you could afford? Now, as you approach retirement, I want you to move into the least expensive housing option you’ll be comfortable in. You’re not worried about building equity. Now you want to live comfortably. If you structured it right, you have paid-off and cashed out your tax-free asset and now bought a wonderful home that better suits your needs.
Need advice for you unique situation? Email or contact me and I’ll be happy to run numbers with you. Remember only a tax professional such as a C.P.A. can give you tax advice. Surround yourself with great advisors to include financial advisors, tax professionals, estate attorneys and of course a powerful real estate agent like myself.