Tax Law Advisors - Your Home: Investment, Capital Gains & More...

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For most of us, our home represents our largest asset. Over time, the management of this asset can make a big difference in our overall financial outlook. One of the largest planning opportunities home ownership brings is the favorable tax treatment afforded the sale of a primary residence.

The gain on the sale of a home is considered a gain on the sale of a capital asset. Any taxable profit you make is subject to a maximum long-term capital gain rate of 15% (down to 5% for taxpayers in the 10-15% federal income tax bracket) if you owned the house for more than 12 months. Gain on the sale of a home may taxable only if they exceed $250,000 for single filers ($500,000 for joint filers) if certain conditions discussed below are met.

Determining Your Net Gain

To determine your profit (gain), you subtract your basis from the sale price minus all costs and commissions. For instance, if you sell a house for $250,000, and must pay your broker 6% of the sale price -- or $15,000 -- your sale price for determining capital gain tax is $235,000 ($250,000 minus $15,000).

Say you bought that house 20 years ago for $35,000. You have since redone the kitchen and bathrooms, put in new windows, added a bedroom, and a new roof. Your basis in the house is $35,000 plus the cost of all of the capital improvements you have made, providing you have documentation verifying the costs. Let's assume the total cost of those improvements over the 20 years you owned the home is $40,000. In such a case, your basis would be $75,000. Your capital gain would be $235,000 minus $75,000, or $160,000. If you are in the 28% federal tax bracket or higher, your capital gain tax on your home sale would be $24,000 unless you use the principal residence exclusion.

The Primary Residence Exclusion

Here's where the favorable tax treatment of capital gains from a residence come in. A $250,000 exclusion for single filers ($500,000 for joint filers) is now available to all taxpayers. You can claim the exclusion once every two years. To be eligible, you must have owned the residence and occupied it as a principal residence for at least two of the five years prior to the sale or exchange. If you fail to meet these requirements due to health reasons, a change in place of employment, or other unforeseen circumstances, you can exclude the fraction of the $250,000 ($500,000 if married filing a joint return) equal to the fraction of two years that these requirements are met. For example, let's say you were forced to move for employment reasons after only living in a home for 12 months. Without the qualified exclusion, your full tax would have been $20,000. Instead, you would pay just half, since you lived in the home 12 of the 24 months required, or 0.5 of the period. The tax of $20,000 multiplied by 0.5 would yield a tax bill of just $10,000.

For many Americans at or nearing retirement age, their home represents a terrific opportunity to "cash out," pad their retirement portfolio with tax-free gains, and help ensure their "golden years" truly live up to the name. Feel free to ask us for guidance in making this important decision.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

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~Tax Law Advisors provides customized pre-tax planning today, so Corporations and their Owners can enjoy a better tomorrow.~

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If you're like many Americans, your home probably represents your biggest investment. But the current tax treatment of capital gains from the sale of personal residences is favorable - gains of up to $250,000 for singles and $500,000 for married couples are generally tax-free, provided you have occupied the property for at least 2 years and it is your primary residence. So depending on your circumstances, moving up to a larger home or one in a better school district, or trading down to a smaller dwelling and realizing gains for your retirement, certainly can be appealing.

Once you have decided to try to sell your home, the next big decision you will face is whether you want to sell it yourself of go through a real estate broker. A broker usually charges 5-6% of the selling price for his or her services. However, realtors often earn their commission (and then some) by knowing the local market, helping you determine a reasonable selling price, and saving you a lot of time and hassles, not to mention the risk and liability that come with selling your home yourself.

In selecting a broker, invite several realtors to tell you what they would deem to be a fair selling price, explain their commissions and fees, and present a marketing plan. They'll probably do this for free in return for the chance to win your business. You will also want to ask about their past experience in the area.

Nearly 90% of all home sales are through agents and brokers. But if the market is a "sellers market" - that is, homes are selling quickly and at or above asking price - and your home is in stellar condition, perhaps you might want to try selling it yourself. There are a number of resources on the Internet designed to help you do just that.

HEAD: Does My House Need Fixing Up Before Listing?

It doesn't hurt to do minor repairs and cosmetic touch-ups prior to showing your home to potential buyers. We hear a lot about "curb appeal" -- how a house appears from the street. Is it attractive enough for a buyer to even want to come in and look? If there are major repair problems, you may have to lower your price in the end. Maybe what you think is important to do to fix up the house will not appeal to potential buyer - they'd rather do it the updating to suit their own taste.

Most real estate and interior design experts will tell you that two of the best "bang for your buck" upgrades are new carpet and a fresh coat of paint. Select neutral colors that will appeal to the maximum number of buyers. Odors from pets, smoking, and unconventional foods should be eliminated as much as possible, or masked by baking cookies or putting a few drops of vanilla into a hot sauce pan for a moment or two. Reduce clutter and consider moving some items into your garage or storage to make the home appear larger. And above all, keep it clean - especially during those times when you know prospective buyers will or may be visiting.

How Much Should You Charge?

This is a more complex question than it appears at first glance. In this situation, you and the buyer are at odds - you want the highest price possible, they want to pay as little as possible. But listing your house for more than it's really worth can backfire. You'll attract fewer buyers to begin with, as your house may be above the top end of their budget, and you may turn away buyers with the resources to purchase your home. Once that initial flush of interest wanes - since realtors and home seekers usually flock to a new listing early - you'll be left with fewer and fewer people who may buy your home.

By definition, the value of any asset is whatever someone is willing to pay for it. A buyer and seller generally find it easier to reach an agreement upon when both parties have access to all the relevant facts. With homes, there are several ways to arrive at a "starting point" from which to begin this process.

A good first step is to see what similar houses in similar locations in your community have sold for in the recent past, known as "comparable sales" or "comps." A good local real estate agent should have ample information about recent sales in your area. Don't be overly impressed by the asking price of comparable homes, which may be inflated or unrealistic; instead, look to actual sales prices as your best guides.

You may also want to enlist the help of a professional home appraiser. For a cost generally between $300 and $500, an appraiser will prepare a detailed evaluation of the estimated value of your home. Then, in conjunction with your agent, arrive at a price low enough to entice a high number of buyers but high enough to meet your goals. In a market where homes are selling briskly, don't worry too much about pricing your home too low - such a tactic could actually result in multiple offers and may even trigger a bidding war for your home!

What If Nothing Happens?

If the real estate market is slow in your community due to national or local economic issues, there isn't much you can do (besides continually lowering the price, which you probably won't want to do). If no one is expressing any interest in your home, or it simply does not sell, you could consider the following:

Lower your asking price.

Make some obvious repairs or upgrades.

Confirm your real estate agent is working aggressively to sell your home and change agents if you do not feel they are.

Try selling the house yourself, lowering the price to reflect the commission you won't have to pay (please note, however, that the buyer's agent will still expect a commission).

Offer to finance all or part of the purchase price yourself.

Offer to include items from the home, such as hot tubs, certain furniture or built-ins, lighting fixtures, and perhaps even a big-screen TV that would be costly to move anyway.

Selling your home may take time and patience, but it deserves your most detailed attention as it is one of the largest transactions you will undertake in your financial life. If you're successful, you'll be saying "Home Sweet Home!" after the sale has closed.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc

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~Tax Law Advisors provides customized pre-tax planning today, so Corporations and their Owners can enjoy a better tomorrow.~

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Your home is likely the largest investment you will ever make, and the things you keep inside it - wedding photos, collectibles, silver and china, jewelry, antique furniture - are probably your most prized possessions. That's why it's crucial to carry enough insurance to safeguard your home and everything in it.

You should have insurance on the land, the physical structure of the house, and also its contents against theft, fire, windstorm, or some other disaster. It's also wise to be insured for personal liability. This would cover an accident that might occur to someone who is visiting or working in your home.

Homeowners Insurance - What's Included

A standard policy provides limited protection against, for example, fire and theft. Broader coverage gives you insurance for additional losses except those specifically excluded from the policy. You can also get special insurance with separate premiums for items such as jewelry, artwork, and collectibles.

What's NOT Covered

No basic policy covers losses resulting from war, riots, police actions, nuclear explosion, or "acts of God." You can sometimes get an endorsement to your policy to cover circumstances that are normally excluded, such as floods and earthquakes, but it will likely be expensive. If you're in an area prone to such events, however, it could prove well worth the cost.

Other Considerations

Consider liability coverage, which protects you if you are sued for causing property damage or injuring someone. As for deductibles, amounts vary. Your insurance costs less if you take a larger deductible, but, of course, you will have to pay the amount of any loss up to the deductible.

How Much Insurance Should You Buy?

You should insure your house for at least 80% of its replacement value. However, most financial planners recommend that you insure your house for its full replacement value, and perhaps the replacement value of the contents of your home. Carefully read the terms of the policy so there will be no surprises in the event of a loss. Some policyholders believe their homeowners insurance will pay to completely rebuild their house, only to discover caps that limit the insurance company's liability and force them to spend thousands out of pocket.

One word of caution . . . when buying a home, if your down payment is less than 20% of the purchase price, you will probably be required to purchase mortgage insurance. Do not pay it as part of your mortgage; instead, pay it separately and cease paying it when your equity reaches 20% of the home's value. Mortgage insurance is designed to benefit the mortgage lender, not the homeowner.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice. Source: Financial Visions, Inc.

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