2 Ways to Avoid Paying Capital Gains on the Sale of Your Home
"In this world nothing can be said to be certain, except death and taxes." - Benjamin Franklin, 1786
Unless you live in a utopian anarchy, taxes are a certainty. However, there are 2 ways to avoid paying capital gains on the sale of your home!
 1031 Exchange vs Capital Gains Exclusion
The first, more well-known way to avoid paying the tax man is a 1031-Exchange. Unless you are an investor, this means absolutely nothing to you. Many homeowners fear the thought of selling their home because of the capital gains taxes that will be collected, but
a 1031-Exchange does not apply to a residential homeowner!
Before you scream in anguish, let me explain how this is a good thing!
Capital Gains Exclusion
The Internal Revenue Service (IRS) has a loophole for homeowners regarding capital gains.
It is so simple and easy to apply for, you are going to wonder why you worried in the first place!
According to the IRS,
"In general, to qualify for the exclusion, you must meet both the ownership test and the use test. You are eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home"
In English, all you need to do to qualify for the capital gains exclusion is to live in your house for 2 years or more during the 5 years prior to the sale. You can't claim the exemption if you've already claimed another exemption during the 2 years prior to the sale.
The one limit to this exemption is if you profit over $250,000 on the sale. While that is highly unlikely on a normal residential purchase, the 250K is only for single persons. It increases to $500,000 if you're married or in a domestic partnership!
Pretty simple and way better than the 1031-exchange!
A 1031-Exchange is beneficial to investors, though.
1031-Exchange
The concept is simple, but I recommend speaking with a lawyer about the details! You sell a property and defer the taxes by reinvesting them into a similar property. For example, you sell a residential rental property, you can then avoid paying capital gains on the sale of your property by purchasing another residential rental property. The annoying part of this is that
you must find the replacement property within 45 days and the transaction must be closed within 180 days.
Conclusion
There are 2 ways to avoid paying capital gains on the sale of your home. The important concepts to remember is that a 1031-Exchange DOES NOT APPLY to residential homeowners, but it is a great thing for investors. Likewise, residential homeowners have their own capital gains exclusion and it is at least 10x better than a 1031-Exchange!
For more information on Capital Gains Exclusions and 1031-Exchanges, check out the following links:
http://www.irs.gov/taxtopics/tc701.html - Capital Gains Exclusion, IRS
IRS
http://www.atlas1031.com/What-is-a-1031-exchange - 1031 Exchange, FAQs
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Monday, December 29, 2014
2 Ways to Avoid Paying Capital Gains on the Sale of Your Home
Monday, December 22, 2014
6 Things Realtors Want First Time Home Buyers to Know
6 Things Realtors Want First Time Home Buyers to Know
1. Buying Your First Home is Fun and Exciting!
As exciting as this is for you, your agent is right there with you! There
will be ups and downs. Your agent is there to keep emotions even and level so
you can make the best choices possible for you and your family.
2. Your Agent Wants to Help!
The majority of agents work on commission, but that isn't
the driving force. Commission is the reward at the end of a long, arduous
process. Your agent won't tell you everything they have to deal with because
their job is to make the deal as EASY and SEAMLESS as possible for you.
3. You Should Select an Agent You Trust!
We all have people in our lives - family, friends, and the
like - that we can inherently trust. However, they are not experts in real
estate. Not that you should exclude them from the process, but if you trust
their guidance over your agent's, then you have selected the wrong agent AND
what are you even using an agent for? You may even have an experienced former
agent as your friend, but things change quickly in real estate. Market
conditions, regulations, and loan programs can and do drastically change from
one year to the next.
4. The Number #1 Expectation of You is Loyalty!
Back to #2, agents are paid on commission. If you think your
agent is great, but you decide to write an offer with another agent - you just
thanked your first agent by punching them in the gut! If you don't think your
agent is doing their very best for you, discuss it with them. If they refuse to
meet your expectations, then switch! However, if they are meeting or surpassing
your expectations and you switch for no reason, then you just gave a potential
paycheck that they were working hard to earn to someone else who hasn't done
anything up to this point.
Another way to look at this is if you put an offer on a
property with an agent you trust and they bring another buyer to put a second
offer on the property. You are now in a bidding war and the agent's commission
is going up! This would be a bad agent in my opinion, but this is perfectly
legal. If you expect your agent to be loyal to you, then you should also be
loyal to them!
5. It Doesn't Cost You Anything to Work With a Buyer's Agent!
I have had a few clients tell me they were reluctant to
speak with me because they didn't know how much it cost just to ask me about
the process! Here's good news: The Buyer Pays Nothing! The commission that a
buyer's agent receives comes from the seller's proceeds. If you are thinking of
buying in the next 12 months, make sure you speak with an agent first so they
can get you directed on the right path.
6. You Don't Need a Large Down Payment!
Many people in my area are unaware of the USDA loan program
which does not require a down payment. Let me repeat that. In my area, you can
buy a home for 0% down! Another question that arises is, how good does your
credit score need to be? 620 is the minimum. It doesn't take much to get you
out of renting and in to owning your first home. Again, this is why it is
important to speak with an agent early in the process so if your credit is low
- they can assist you getting it to where it needs to be when you are ready to
make an offer!
Tuesday, November 18, 2014
Chehalis Homes under 125,000 - 283 James Street, Chehalis
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Thursday, October 23, 2014
618 SW Chehalis Avenue - Move In Ready!
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Saturday, October 18, 2014
Paradise in Centralia - 2433 Howard Ave
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