Did you know there are tax benefits to owning and selling your home? When it comes to paying Uncle Sam, owning property can actually work in your favor. The key is to sell at the right time, that is when your tax returns are not due. Selling before or after this time has its definite advantages if you pay close attention to the tax laws.
The Tax Payer Relief Act of 1997 has been credited for helping the real estate sector stay ahead of everyone else. This provides you much-needed tax shelter and keeps you from having to pay a fortune. According to tax law, when you sell a home, you are allowed to keep tax free capital gains up to $500,000 if you are married and file jointly. If you are single or married and file separately, that amount is $250,000. In order to qualify for this, your home must have been the prior residence in which you have lived for at least two out of the five years prior to when you file. Theoretically, this exclusion is one that can be used multiple times every two years as long as you qualify by meeting the requirement previously described.
So how can this really benefit you? Let’s say you buy two homes. You live in one and rent the other. After two years, you qualify for the exclusion. You sell the home in which you live and move into the other. After two years of residing there, you sell it and use the exclusion again. Here you would qualify and reap the benefits twice within a four year period.
There are special provisions for when you are forced to sell before the two year period of time is up. These include: death of a spouse, divorce, illness, relocation due to a job change, war, natural disaster, or some other unforeseen problem. If you encounter circumstances that qualify, the $500,000 or $250,000 exclusion can be prorated. What this means is you can exclude the prorated amount in capital. For example, if you are married and file jointly, and only live in your home for a year, the amount you will be able to exclude is $250,000. This amount would be $125,000 for anyone single or married and filing separately if only living in the home one year prior to the unforeseen circumstance or event.
Filing taxes is a must, but understanding the tax laws pertaining to home ownership can benefit you greatly. Just think of how many times most people actually sell multiple homes within their lifetimes. If you own several properties, you may really benefit from this tax exclusion, thus making your investments extremely worthwhile. In fact, it may just be yet one more reason why buying is preferred over renting.