Deferring Taxes on the Sale of Your Personal Residence

One cannot repeat this information too often. I gave a talk today at the local Women's Club and discovered again (as I do in almost any large gathering) that some folks still do not realize that one can sell his or her personal residence and exclude the gain on the sale from taxation. So here goes the outline of my talk today ---

Sale of a Personal Residence and Exclusion of Gain

In selling a personal residence, the seller may be able to exclude from tax up to $500,000 ($250,000 if the seller is single or otherwise does not file a joint return) of the gain on the sale. Please note that this exclusion is not available for vacation or second homes.

To qualify for this exclusion, a number of factors must be considered:

Principal Residence

The residence must have qualified as the principal residence of the taxpayer for an aggregate of two years during the past five years prior to the sale.

-To be a personal residence, it must have been owned and used by the taxpayer during the two year period.

-In the case of a husband and wife filing a joint return, the exclusion will apply if either satisfies the ownership requirement.

-If the residence is received from a former spouse in a divorce or separation proceeding, generally the ownership of and use by the former spouse will, subject to certain limitations, be attributed to the taxpayer.

-If the taxpayer during the five year period resides partly in a nursing home, that period will be treated as using the principal residence if the taxpayer actually uses the residence for an aggregate of a year.

-If the failure to meet the two year period is attributable to employment, health and other unforeseen circumstances, then a proportionate part of the exclusion will apply, which proportion is based generally on the percentage of the two year requirement met.

Limitations on Use

-Two Year Limitation. The exclusion applies to one sale every two years only.
Note that if you own a second home, vacation or rental property, you could sell your principal home now and avoid the taxes on the gain, then move into your second home and stay for 2 years and then sell that also as your principal residence and avoid the taxes on the gain on that one also.

-Depreciation Recapture. Any depreciation deductions taken on the residence after May 1997 will be recaptured and gain recognized.

Note: This information is supplied by Barbara Gaines, a Realtor with Real Estate One. Barbara is not an attorney nor an accountant, so it is advisable to seek opinions from both your attorney and accountant prior to relying upon this information.

If I can answer any real estate questions for you, please feel free to call me at 734-439-8405.

Seller Incentives in New Construction

I had lunch with a real estate sales rep for a large developer yesterday and visited with another sales rep for a different large subdivision last week. Both spoke of the incentives they now offer. It used to be . . . you went to a new development neighborhood and paid the posted price for the house you wanted and paid the list price for all the upgrades. If you couldn't or wouldn't, you went elsewhere. Not today - now the salesperson may offer as much as a $10,000 incentive in upgrades. If you have a definitive price point but want lots of stuff, they may say, "Well, let me discuss this with the builder, and we'll get back to you."

What does all this mean to you current Sellers with your homes on the market? You need to get aggressive with your pricing and get competitive. You have to show your home in clean tip-top shape. If you are downsizing, you may have to take a loss if you've lived in your home only a few years and bought in a hot Seller's market. Take it sooner rather than paying an additional 6-8 months house payments hoping you'll get lucky! If you are a move-up Seller, don't worry. The lower price you may have to take to sell today will be replicated when you buy your bigger house, but in bigger dollars, so you come out ahead!

And if you are a first-time buyer or an investor, jump in the market now! It's a fantastic market for Buyers! Call us today at 800-923-3245.