Seven Things to Know Before Selling Your Home
By Admin at 26 May, 2009, 9:21 am
Financial Planners often focus on developing tax-free cash flow streams in order to manage taxes during retirement. While many mention the Roth IRA, few talk about the benefits you can receive by downsizing your home and moving into a lower priced one. How can one get tax-free income from downsizing? If you have met certain requirements, up to $500,000 of the gain you realize on the sale of your current residence can be tax-free. The IRS suggests that you keep the following tips in mind when contemplating a home sale:
1. You and your spouse each area allowed a $250,000 capital gains exclusion when you sell your home.
2. To qualify for this exclusion, you must have lived in the home at least two out of the last five years.
3. You must have used the home as your main residence.
4. If your capital gain does not exceed your exclusion, you do not need to report any gain on your tax return.
5. If your capital gain exceeds your exclusion, you then must file the capital gain on Schedule D of your 1040 return. You will only be taxed on the gain that exceeds your exclusion. Currently, the maximum tax for long term capital gains is 15%.
6. If your home has declined in value, you will not be able to deduct your loss.
7. If you have more than one home, you may only exclude the gain from the sale of one home. After you sell your first home though, you can sell your second home if you have lived in it for two years and again take advantage of this capital gains exclusion.
Consider this example, if you and your spouse purchased your home more than two years ago for $100,000 and it is currently worth $600,000, You could sell your current home and receive $600,000. Since the gain does not exceed $500,000, you do not need to pay taxes or even mention the sale on your taxes. If you were to turn around and buy a smaller home for $350,000, you would be left with $250,000 of tax-free income that can be invested to support your retirement needs.
If you are not getting all of the advice that you should be from your financial planner, visit Asset Design Center for free financial planning information.
Gary Lewis’ ideas incorporate more than 30 years working with investments including 20 years experience in the derivatives industry and 10 years as a fee-only comprehensive financial planner. He specializes in designing portfolios that meet the client’s required rate of return with a minimum level of volatility. You can read his writings on financial markets at Stock Market Ideas.
Gary holds the CFPA® and ChFC designations and earned a Master of Management (MM) degree in finance from Northwestern University. He currently resides in Mexico City.
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