Save Money With the $250,000 Tax Exclusion

Did you know that when you sell your own personal property, you can incur up to $250,000 in profit as a single owner and twice that amount if you are married WITHOUT owing any capital gains tax. Prior to 1997, the only method of avoiding taxes on your profit required that you utilized the money to purchase a more-expensive home within two years from the sale date. This rule caused much strife for young people, especially the ones that had jobs that required lots of moving around. Many a time occurred that somebody with perhaps a $200,000 home ended up with a home worth less money just because of their attempts to defer tax. Of course, if you were fifty-five or older, you could select to receive a special once-per-lifetime exemption of up to $125,000.

Everything changed in 1997 when on August 5th, President Clinton signed the Taxpayer Relief Act of 1997 into law. This new law eased the strains of tax burdens on millions of Americans. According to the law, single property owners could avoid tax on up to a maximum of $250,000 of profit. Additionally, married couples were afforded tax deferments on profits of up to $500,000. Older people also benefited with this law because in addition to being able to claim their once in-a-lifetime exemption of $125,000, they were now also allowed exemptions based on whether their profit ranged between $250,000 and $500,000 and whether they were single or married. Keep in mind that this law only applies to the sale of a “primary residence” that you have resided in for at least two to five years. Furthermore, the exemption can only be used once every two years.

In regards to having a primary residence that you have lived at for at least two years, keep in mind that the two years need not be consecutive. That means that you could theoretically live there one year, rent it out for another year, then live there again for a year, and then rent it out for another year, and then sell it and obtain your exemption.

Another great additional benefit of the tax law is that once you rack in all the money, you need not necessarily purchase another piece of property with it. If you want, you can take a trip to Disneyland or a cruise out on the Caribbean! In fact, you can use the exception as many times as you want, as long as you wait two years in-between each sale.

If you happen to move into a rental home that you gained through a like-kind 1039 exchange, you need to hold the property for five years minimum before you can sell it and gain any exemption. This means that if you purchase the property in 2002, move in immediately after, and then sell it in 2004, you will not gain the exemption. You must wait until 2007 to sell it.

As was mentioned earlier, married couples get to receive double the exemption. In addition, as far as the two year minimum goes, it depends on both partners. For instance, if you have resided at a residence for two years and then get married, you have to wait another two years to get your $500,000 exemption. Your partner will need to move in with you and stay there for two years. If however, you two were already living together for two years, then you are allowed the exemption. You also need to check your partner’s home buying and selling past. If he or she sold a home within less than two years ago, you are out of luck. You will have to wait until the entire two years are over.

Once you have figured all that out, you must determine whether you are going to earn a gain. To determine the gain, you need to determine your “basis”. This amounts to adding up what you initially paid for the property, as well as the cost of any improvements that you have made to the home such as adding a new window, painting a room, or finishing the basement. After that, you subtract your basis from the amount that you sell your home for. This resultant amount is your gain. If the gain is over $250,000 <for a single person> or $500,000 <for a couple>, then you will have to pay Uncle Sam some taxes! That is why it is extremely important that you keep detailed records of your initial purchase and all the additions you make to the property! A couple minutes of record-keeping can end up saving you lots of money in the future.

• The Best Real Estate Investors Work In Teams
• Basic Essentials of a Real Estate Contract
• Finding Your First Major Investment Deal
• Purchasing Worthwhile Real Estate
• Basics of the 1031 Exchange
• Save Money With the $250,000 Tax Exclusion
• How to Calculate Cash Flow
• Do You Have What It Takes?
• What is a Land Contract?
• What is Fair Market Value
• Choosing the Right Mentor
• How to Fix Up a Home for Resale
• Being Available 24/7
• Using Direct-Mail to Attract Buyers
• How to Flip Houses for Profit
• Relying on Private Mortgage Lenders
• Avoiding Failure in Real Estate Investment
• Closing A Deal
• Basic Types of Foreclosure
• Using Credit to Finance Your Property - HELOC
• Dealing with Liability
• Making Your First Purchase While Young
• Dividing Property Amongst Several Owners
• Essentials of Making Money in Real Estate
• Taking Advantage of the Economy
• Moving Essentials