Moving Up

Taxes and the Sale of Your Home

The Taxpayer's Relief Act of 1997 made some important changes to the way real estate is taxed.  Married homeowners filing a joint return are allowed to sell their principle residences at a profit of up to $500,000 without paying capital gains taxes.  Single return filers can exclude up to $250,000 of gain.  With this exclusion, you don't have to purchase another home of equal or greater value within two years to defer your capital gains as the old rules required.

To qualify for the exclusion, the taxpayer(s) must have occupied the home for two of the five preceding years.  The home may have been a rental property, but must have been a principal residence for two of the last five years.  For taxpayers who cannot meet the two year requirement, there is a formula for giving a partial exclusion.  If the gain on the sale exceeds the maximum exclusion, normal capital gains tax rates will apply.  This new exclusion replaces the once-in-a-lifetime exclusion normally reserved for people over 55 years of age.  It will allow a homeowner who meets these requirements to make a tax free profit on the sale of a home without having to reinvest in another home.  These new rules will open many new strategies for homeowners that haven't been available in the past.  This exclusion applies only to principal residences and doesn't apply to second homes or vacation homes.  Sales of these properties are treated as income-producing property to which capital gains tax rates would apply.

For instance, if a person is being transferred from a high-cost area to a lower-priced area, in the past the person would have to buy at least as expensive a home to defer gains.  Now, they can make a tax-free profit, subject to the limits on the sale and buy down and incur no tax liabilities.  Another example might be a person who has a large gain in a rental property might convert it to a principal residence for two years and sell it and only pay tax on the depreciation recapture.  A couple of examples follow.

Move-Up Tax Analysis

Move-up buyers face different issues when making the decision to purchase a home than do first time homebuyers.

1. Often they want to reach to the stars to purchase their "dream" home.
2. They usually have factors to weigh like college expenses, car payments, second homes retirement planning, etc., that first time homebuyers don't have.

Both of these issues can result in the move-up buyer becoming very uncomfortable with the monthly payment they are facing.

Tax analysis shows homebuyers hidden savings when moving up.

To ease the concerns of the move-up buyer and create a level of comfort with their prospective new house payment, we have a detailed review we call the "Move-up Tax Analysis". This simple program provides information to the client that allows them to not only make a more informed decision of whether "moving up" is a viable option for them, but also whether they should stretch even more to purchase their "dream" home.

The above is a summary of the proprietary Move-Up Tax Analysis by Cherry Creek Mortgage. The full report includes a line by line comparison of past and prospective taxes on form 1040 and Schedule A. Call me to schedule a Move-Up Tax Analysis. To protect privacy, the chart above is of a different analysis than referred to in the article. The clients in this example benefited when their refund increased from $2,616 to $9,925, or by $609 per month!

While first-time homebuyers tend to have fewer financial complications and move-down buyers usually have a strong cash position, move-up buyers often have to weigh factors such as college funds, multiple car payments, a family vacation, a major career move or retirement planning. In the end, the mortgage payment they qualify for may not be the one they can comfortably afford.

This was the predicament faced by Jeff and Sally, who had been looking at new homes. While well qualified, they were worried about the squeeze the monthly payment would put on their cash flow. They turned to Cherry Creek Mortgage, who had financed their previous home. Using the MOVE-UP TAX ANALYSIS, I showed the couple how purchasing their dream home would provide them with an aditional $501.27 in monthly income tax benefits, or $6,015.24 per year. (To protect privacy, the chart above reflects another analysis, not that done for Jeff and Sally.

Tax Analysis Typically Focuses on First-Time Buyer

Almost all the consumer education available about the tax benefits of owning a home is directed at first-time buyers, so it's not surprising that many move-up buyers don't give enough consideration to this variable. Not everyone wants to stretch their monthly payment to the maximum, but everyone does want to get the most house that they can comfortably afford. Call today for your Free, personalized Move-Up Tax Analysis.

Cherry Creek Mortgage
4301 Hacienda Dr. Ste. 120
Pleasanton, CA. 94588
Phone 800-325-2062
Fax 925-520-0231

privacy