For many Americans, their largest asset is their home! This can make financial planning difficult, because the utility of living there is probably more important than the income it could generate.
Aside from the liquidity aspect of the home as an asset, you may wonder how to deal with taxes. If you lived in the home for a long period of time, the appreciation could be a significant amount. Perhaps you got a new job and wish to move cities, renting until you get a lay of the land. Maybe the kids have all moved out and you find yourself with an abundance of space, it may be time to downsize!
If you sell your home after a large amount of appreciation, how are you taxed? Generally, when you sell an asset, you are on the hook for a capital gain, this is the difference between the selling price and the price you paid. If you did any remodeling or improvements, this can often be added to your cost basis.
If you sell your home for a profit, it may be possible to exclude up to $250,000 of gains if you are single or $500,000 if you file as a joint married couple.
This can be a great strategy, but it is important to qualify. To get the exclusion, you must meet 4 criteria:
1) Ownership Test - Over the last five years, ending on the sale date you must have owned the home for a minimum of 2 years.
2) Use Test - During the same 5-year period as the ownership test, you must have used the property as your primary residence for at least two years.
3) Previous Sale Test - Over the last two years you could not have sold a home and benefited from the gain exclusion.
4) Joint Filer Test - To get the extra $250,000 to exclude a total of $500,000 at least one spouse must pass the above ownership test. Additionally, BOTH spouses must pass the use test.
It can be daunting to try and sell your largest asset, particularly if your dreams, goals, or career calls you to move from your current residence. With some understanding and planning, this process does not have to be painful or overwhelming.
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