What other investment will allow you to have up to $500,000 capital gain tax-free? As I said in the previous article, your personal residence is most likely the single largest purchase you will make in your lifetime. Investing properly in the right home for you and your family can be a very good money management play for your long term goals.
The tax code recognizes the importance of home ownership by providing certain tax breaks when you sell your home. The type of home involved is less important. A single-family home, condominium, cooperative apartment, mobile home, or houseboat can all count as a residence.
Your home sale will qualify for the exclusion of $250,000 gain ($500,000 if married filing jointly) if the following are all true: 1) You owned the home and used it as your main home during at least 2 of the last 5 years before the date of sale. 2) You did not acquire the home through a like-kind exchange (also known as a 1031 exchange), during the past 5 years. 3) You did not claim any exclusion for the sale of a home that occurred during a 2-year period ending on the date of the sale of the home, the gain from which you now want to exclude.
People still occassionally ask if they have to buy a replacement home that costs as much or more than the one they sold. The answer is no. That rule went out a very long time ago. This presents a perfect long-term tax planning opportunity for anyone who might want to down-size or relocate at retirement!
The ability to exclude $500,000 from taxation is huge. If you had a $500,000 taxable capital gain, even though the tax on the long term capital gain might be limited to 20%, you would pay the additional investment tax and your other income would be taxed at a higher bracket. In addition, if you are at Medicare age, an excludable gain on the sale of your home will not affect Medicare Premiums. A taxable gain could cause your Medicare Premiums to increase by as much as $4,000 in one year. Utilizing this tax break should be the foundation of almost everyone's long term money management plan, or at the very least, a consideration.
My last point on viewing your home as a tax advantaged investment, and not just a home is this. Precisely because it is the largest purchase you will make in your lifetime, you should consult and be gladly willing to pay for professional assistance when you buy. I have many good clients who are realtors and I can tell you this. The ones that have been in the business for a long time are very knowledgeable and less concerned with a commission than your happiness and satisfaction with your purchase. The last thing they want is a customer that is unhappy with a purchase they advised them on. And their advice can save you thousands of dollars in the long run.