Terrylynn's Blog

Think about this.  The IRS gives a maximum exclusion of the gain on your personal residence upon sale of up to $250,000 for a single person and a $500,000  to a married couple.  (NOTE-this is a simplification of circumstances.  There are exclusions and additions to some of the rules stated herein and you should go to http://www.irs.gov/publications/p523/index.html for more information.  This example is for illustrative purposes ONLY.  AND I am not giving tax or legal advice, you should consult your CPA and/or Attorney regarding your particular circumstances).  But follow along here as this gives you something to think about.

The IRS Publication 523 states -

"Purchase.   If you buy your home, your basis is its cost to you. This includes the purchase price and certain settlement or closing costs. Generally, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home.

Settlement fees or closing costs.   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. You can include in your basis some of the settlement fees and closing costs you paid for buying the home. You cannot include in your basis the fees and costs for getting a mortgage loan. A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing)."

SO, if your home was purchased for $200,000 and your allowable settlement (closing) costs were $7000 at the time of purchase.  Then the cost basis of your home is $207,000. 

Fast forward to selling your home.  If you sell your home for $900,000 20 years later then, IRS Publication  523 states-

"Amount Realized-The amount realized is the selling price minus selling expenses.

Selling expenses.   Selling expenses include:

-   Commissions,

-   Advertising fees,

-   Legal fees, and

-   Loan charges paid by the seller, such as loan placement fees or "points."

SO, if your home sells for $900,000 you would take off the selling expenses, say $63,000, then your amount realized is $900,000 minus $63,000 or $837,000.

IRS Publication 523 says - Maximum Exclusion - You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.

-   You meet the ownership test.

·         You meet the use test.

·         During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed.

You may be able to exclude up to $500,000 of the gain on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons.

Then you take $837,000 minus what you paid (your cost basis) $207,000 which gives you a gain of $630,000 of which $500,000 for a married couple is excluded from the gain.  That leaves $130,000 which is taxable as ordinary income!!!  WOW!  That's a lot of money.  If you are in the 30% tax bracket, that is $39,000.   And there may be an alternative minimum tax due as well.  (A single person has other considerations applicable if married and divorced, because of death of a spouse, there may be stepped up basis, etc. check the Publication 523 for more details.)

So, back to the point of this article.  If you have lived in your home a long time and would owe tax on the proceeds over and above the maximum exclusion, the sale of your home when you have $500,000 of maximum exclusion for a married couple could be now.  Using our example, when deciding whether selling at a high of $900,000 or selling now (when the market is down 20%) for $720,000 may be a wise decision. 

Take $720,000 minus selling costs $50,400 gives you a cost basis of $669,600 minus $207,000 that you paid equals a realized gain of $462,600.  Your married couple exclusion of $500,000 means you will owe no tax.

AND, IRS Publication 523 says---

Ownership and Use Tests

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

·         Owned the home for at least 2 years (the ownership test), and

·         Lived in the home as your main home for at least 2 years (the use test).

More Than One Home Sold During 2-Year Period

You generally cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you cannot exclude the gain, you must include it in your income.

TERRYLYNN FISHER, Diablo Realty, Realtor, Staging Specialist - CSP/Realtor (Certified Staging Professional), CRS (Certified Residential Specialist), SRES (Senior Real Estate Specialist). Terrylynn is in her 30^th+ year in real estate, works in ALL kinds of markets and has a referral directory of Realtors who use similar marketing in your hometown too. She can be reached at 925 876-0966 for referrals or questions.