A lot of times, as I am having conversations with my seller clients, we discuss the tax implications of the sale of their home. Some clients totally understand their situation, others have no clue, some think they understand but get confused with a homeowner’s exemption and the benefits of the 1031 exchange. If you want more information on 1031 exchanges, check out my other blog on 1031 exchanges (https://realestateofhawaii.com/real-estate-blog/what-is-a-1031-exchange/). Keep in mind, this information is for educational purposes, please consult with your CPA or tax attorney. Everyone’s situation is different.
So, this week, I met with a potential client who just inherited his parents’ home. He was thinking of selling the current house he lives in or keeping it to rent out. Keep in mind that I am a true believer in real estate investing as a great way to diversify your investment portfolio and create legacy wealth. But when I get asked this question, I try to present both sides so that the owner can make an informed decision for their situation. In this case, with the client’s current financial situation, the current market trends, and his specific tax situation, the client decided he wants to sell.
One factor was that the owner wasn’t sure if he wanted to deal with tenants and continuing repairs of the aging home. The bigger factor that tipped the scale towards selling now was the $500,000 exemption he and his wife would get if they were to sell their home now. You see, if you lived in your home 2 of the last 5 years, you get exempted from taxable gains, $250,000 if you’re single, $500,000 if you’re married.
So, for my client, it meant saving $75,000 in taxes, maybe more. One thing to clarify about this home-owners exemption that sometimes people get confused is that, with the exemption, you get the savings on the taxes, and that’s it, you don’t need to do anything else. Sometimes sellers ask me if they need to roll the proceeds into the purchase of their next home within a given period of time, NOPE. There are no replacement property stipulations. I think they get confused with the 1031 exchange requirements which is for investment property and not primary residences. So, when you’re considering selling your home, don’t forget to consider all factors including the tax implications before making your final decision.
Thanks for reading and in the words of the late American Historian, Albert Bushnell Hart, “Taxation is the price which civilized communities pay for the opportunity of remaining civilized.” Until next week!
