Move Up and Pay NO Taxes

By
Real Estate Agent with GreatWest Realty DRE# 00827565

 

 

Some homeowners are hesitant to "move up" to a bigger or more luxurious home or location.  They may be cautious about selling because they feel they may have to pay substantial taxes on the equity that has accrued on their present home.  They concern is likely based on old IRS rules regarding some home sales prior to May 1997.  Often homeowners can "move up" and pay no taxes!  Here's why.

The profit tax can be avoided when selling a home by purchasing another principal residence of equal or greater cost within 24 months before or after the home's sale.  But many home sellers get confused about the technicalities of the current tax rule, which is far more liberal and taxpayer friendly, than the older replaced "rollover residence replacement rule" of IRC 1034. 


If you live or dwell in the house for two of the five years before you sell, the IRS won't collect tax on sale profit of up to $250,000 if you're single or $500,000 if you and your spouse file a joint return.
  The stipulation that sellers need be aged 55 or older to qualify, was eliminated with the replacement of IRC 1034, by the "2 out of 5" rule initiated on May 7, 1997.

Currently the law rewards people who sell frequently. In this current market, homeowners who sell every couple of years can benefit.

Still, remember to always keep track of what you paid and what improvements you make. The improvements add to your home's basis, which you subtract from the sale price to determine your profit and whether any of it is taxable.

Surprisingly, many home sellers don't know how to determine their net sales price and their profit of their old home.  It's really quite easy.

Home sale profit is the difference between the home's "adjusted sales price" and the "adjusted cost basis."

Adjusted sales price is the same as the net sales price.  That's the gross sales price minus selling expense.  To illustrate, suppose your home buyer pays $250,000 for your house.  But from this money you must pay sales costs of $15,000 for the real estate commission, and $3,000 in miscellaneous other fees.  Thus your adjusted or net sales price is $232,000.

Your home's adjusted cost basis is determined by adding (1) your purchase price, (2) most closing costs which were not tax deductible at the time of purchase, and (3) capital improvements added during ownership, and subtracting (1) any depreciation deducted for business use, such as home office and (2) any casualty loss tax deduction claimed during ownership.

For example, suppose you paid $150,000 for your home, had $3,000 of non-deductible closing costs at the time of purchase, spent $20,000 on remodeling project, deducted $2,000 depreciation for an office at home, and claimed a $4,000 casualty loss.  Your adjusted cost basis is therefore $167,000.  The $167,000 deducted from your $232,000 adjusted or net sale price produces a $65,000 sale profit.

For important tax questions it is advisable to seek the advice of a tax professional or CPA.

close

This entry hasn't been re-blogged:

Re-Blogged By Re-Blogged At
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the magnifying-glass to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Topic:
ActiveRain Community
Location:
California Sacramento County Sacramento
Groups:
Addicted to Active Rain
Dedicated Bloggers
Diary of a Realtor
Feather Nesters
REALTOR LIFE
Tags:
sacramento real estate news
sacramento home buying
home selling

Comments 10 New Comment

Rainmaker
349,510
Ricki Eichler
Broker,GRI,ABR,TAHS,ePRO - Your Texas Hill Country
Ricki Eichler Real Estate LLC

Hi Myrl,  Good blog with an easy explanantion and good example.  Sellers will appreciate this.

February 26, 2011 11:41 PM
Rainmaker
1,221,075
Ron & Alexandra Seigel
Luxury Real Estate Marketing
ra@napaconsultants.com

Hi Myrl,

This is a great reminder for the moving up set.  Thanks for sharing it.  A

February 27, 2011 01:34 PM
Rainmaker
591,182
Laura Giannotta
Your Realtor Down the Shore!
Keller Williams Realty - Atlantic Shore

Now is the time for home owners to move up, if they can.  It's unfortunate that in New Jersey, they're often not able because of property taxes!

February 27, 2011 06:09 PM
Rainmaker
509,072
Maria Morton
Kansas City Real Estate 816-560-3758
BHG Real Estate - Kansas City Homes

Myrl, this is such a good post for home sellers and move up buyers to understand the tax advantages when selling and buying.

February 27, 2011 07:25 PM
Rainmaker
354,919
Linda D. Pufford
ASPM, Marin/Sonoma Home Stager
Stage with Divine Style - Home Staging

Myrl,

Really great information... Sellers are smart to list with you so that they have all the latest information.  Thanks for sharing it with us!

March 01, 2011 07:11 PM
Rainmaker
1,067,618

Myrl Jeffcoat

Greater Sacramento Real Estate Agent
Ask me a question
*
*
*
Spam prevention

Accessibility option: listen to a question and answer it!

To submit the form,
drag the sunglasses to the circle on the side.

Type below the answer to what you hear. Numbers or words, lowercase:

Additional Information