A client recently asked when he and his wife should use his one time $125,000 over age 55 capital gains tax protection; they were approaching their mid 50s.  To his surprise, I told him since 1996, you can keep the first $500,000 in real property “lottery winnings” when you sell your home, and do this every two years.  I googled and found that you can get 1990 (older) articles still talking about the outdated information.

The one time rule is long gone, yet often people hear from a friend of their neighbor’s third sister, who’s married and read some where….  you get the drift.  Ask a professional.   Call with questions; leave NOTHING to chance.

Buying and selling real estate are epic, life changing events and should be done with ALL the pertinent information.  Acting now or doing absolutely nothing both could be the right answer at this time in your life.

“This publication (523) explains the tax rules that apply when you sell or otherwise give up ownership of a home. If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly.”  ~IRS

Your main or prime/principal residences is covered under the IRS code 1034, the usual term for the home you live in; for example, the time test is living in the home for two of the last 5 years.  And it need not be continuous, but cumulative.

Example: The Smiths bought 123 4th street for $300,000 in 2011; today it is worth $700,000.  If single, you would exclude from cap taxes the first $250K; IF married all the gain would be excluded.  You get to factor in selling costs, buying costs, improvements to cut the taxes you pay.   Check with your tax guy for details.

Why is this important?  Buying and selling a home is best done with a level head and all the facts.   We topped out in values in 2007-8; then the so-called mortgage meltdown.  Short sales, losing homes, misery AND opportunity.  Come 2011 or so, we hit home values bottom here in Southern California.  Since then, the last 7 years has seen the rebound in values.  Many homes purchased since 2005 are worth more, from $1 to hundreds of thousands.  Doing nothing IS a decision…so is planning ahead.

Also of import, as of third quarter of 2018, in many areas, runaway demand has softened; you don’t have five buyers’ agents on your welcome mat with offers the day the sign goes up, even if priced reasonably.  Values are up and yes, you can still do ok, but note that with the increase in rates and higher prices, buyers are pausing OR can’t afford to buy what they could in the first quarter of 2018.  These factors can put a lid, temp or long term is the crystal ball, on rising prices.  This fuels the hesitation on buyers acting as well, what with the good news of income tax rates down and a re-energized economy prompting the Fed to act of interest rates.

Simply put, is it time to sell?  Note that a dollar in a bank called “bank” or a bank called “home equity” have equal paper value until you do something.  The bank dollar gathers a couple per cent interest, a good thing and savings for another day.

The equity dollar, in fact up to $500,000 (adjusted up and down by improvements and costs of sale & purchase) of them, can be converted to gold, silver or ? upon sale with NO tax exposure.

Obviously, the IRS is the final arbiter on this: for the details of exclusions, time frames etc, go to https://www.irs.gov/publications/p523.   In Publication 523, you can sort through your particulars.

I am not a real estate attorney or CPA, so I do recommend your tax guy gets your call for details.  He or she knows your particulars, but this factor can mean turning your equity gold into a new, trade up or go smaller, keeping or using some equity free of taxes for other purposes, increasing or changing your asset picture.

Such as increasing family; Donna and I had 8 kids by our 15th anniversary (no batteries in the TV remote?) and we are sooo blessed at the 11.  But, maybe your home’s values may have topped out.  Even if they continue to go up, and you trade up to bigger or better digs while interest rates are low AND you needed (or wanted, two diff things) more room.

Other factors include the new 2017 ADU streamline laws (adding on up to 30% of your home on your home or a separate up to 50% accessory dwelling unit, previously called granny flats.  It could be a great way to cash out mom and/or dad’s home, especially if you’ve lost one of your parents, to build on, attached or separate, getting prepared for the succeeding years.  Gerontologists say it is best for a seasoned parent to stay in familiar (ie their home) until absolutely necessary, but for generations, parents and grandparents weren’t shipped off to convalescent homes due to inconvenience.  Different generations lived within the same household and guess what, BENEFITED from each other.

Factor in the cost of assisted living ($4000-8000 a MONTH) and the fact the time will come when your parent is better closer to you.  Don’t unilaterally kidnap mom and sell her home but at least discuss as a family while things are normal, call me for some suggestions to consider.

I STILL make house calls.

Len Beckman

Len has practiced real estate for 30 years; he has an MBA with a marketing emphasis and is always available to answer questions.  The times they are a’changing and he wants to help you be prepared.  He uses 84 listing sites to market your home and aggressively works to get you the most money in the least amount of time…when YOU are ready.

The Tax Rule for your prime (principal) home.   Tax rule 1034