Will You Owe Tax on the Sale of Your Home?

Another reason why planning is important.

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The sale of a personal residence continues to pester owners, especially now that new capital gains rules are growing closer to implementation. On December 31, 2012, the Bush tax cuts are set to expire and the new health care taxes will kick into gear. Just last week, an elderly client contacted me worried about a political letter she received outlining these new tax changes – specifically the 3.8% capital gain tax when married investors have over $250,000 of income. Even if you are normally in a much lower tax bracket, the significant gains in the sale of a personal residence bought 30, 40, or even 50 years ago could potentially catapult you into this higher tax zone.

Before you get too worried, you need to keep in mind that the Taxpayer Relief Act of 1997 created a $250,000 gain exclusion on personal residences for single filers and a $500,000 gain exclusion for joint filers. This wonderful tax break is provided you lived in the house during 2 of the last 5 years. This bill made a huge difference in the real estate world. Prior to this law, you could exclude the gain if you purchased a more expensive home within two years, and owners over age 55 had a one-time exclusion of $125,000. During this era, home owners had to keep voluminous records on the cost basis for the home and any improvements they made, in order to reduce the taxable capital gain upon the sale of the property.

There is a second aspect to the law as it pertains to gifting. Make sure you don’t let the benefits of this personal residence exclusion slip through your fingers by gifting any portion of the home to an heir. The exclusion only applies to personal residences, so if you gift a home to your son or daughter, and it is not their personal residence, they will pay all applicable capital gains on the sale from the time of initial purchase, not from the time of the gift transfer. This is a great benefit if the proper planning is done beforehand.

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

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2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437