Another Benefit to Homeownership
Posted on: October 30, 2007
Whenever you sell real estate, the IRS wants a piece of the pie. This is called capital gains tax. For most real estate owners, capital gains tax can be avoided. One thing you need to remember is you pay tax on your gain, not your equity; gain and equity are different. Net equity is the amount left over after all selling expenses. The IRS and the state aren’t interested in your net equity because they tax your gain, the difference between the purchase price when you bought it and sales price when you sell it.
In 1997, Congress developed special rules for selling your primary residence. Now, you do not pay capital gains if you have owned and occupied your primary residence for two years of the five-year period prior to the sale. If you are single you can eliminate your capital gain up to $250,000; and if you are married filing jointly you can eliminate your capital gain up to $500,000. There is no limit to how many homes you can use this exemption for as long as it was your primary residence for at least two years of the last five years. If the two year requirement is not met due to unforeseen circumstances (i.e. employment, health, birth of more than one child), the law allows you to prorate the exclusion.
This exemption gives you the ability to grow a nest egg tax free. With an average appreciate rate of 5%, the $10,000 down payment invested in your Portland home will return $110,000 after 10 years, tax free. Lawrence Yun of the National Association of Realtors recently illustrated the power of homeownership in his article The Long View.
“The same $10,000 invested in the stock market appreciating 10 percent annually will result in $23,600. No wonder the data from the Federal Reserve show consistent results year-after-year of the staggering difference in net worth between homeowners and renters. A typical homeowner had $184,400 in net worth versus only $4,000 for a typical renter.
As always, I recommend you speak to a certified public accountant regarding any tax issues. Give me a call if you need a referral to a good CPA. If you are ready to stop renting and start owning, just pick up the phone; I’m ready to help you.
Written by Heidi Beylund, ABR & Realtor® for PortlandRealEstate.com.