Creating Wealth via Home Ownership

Vince’s Finance 101-Creating Wealth via Home Ownership (courtesy of Vince Kingston, Ridge Mortgage Services)

At least for homeowners, the reward is less taxes. As mentioned in previous newsletters, Uncle Sam provides generous tax subsidies to homeowners by way of their mortgage interest deduction. But wait, it gets even better. The IRS literally fawns over homeowners by providing the largest single capital gain exemption available on the sale of their primary residence. This is called the Primary Residence Exclusion.

What does this mean to you, the homeowner? The primary residence exclusion allows you to sell your home and receive all of your gain on the home 100% tax free up to certain limits and after a specific time of ownership. For example, if you sell your $400K home after owning it for more than three years and you only owe $300K, then you will have a $100K gain after you pay off your existing mortgage. Per IRS guidelines, as long as the property qualifies, you will receive this $100K tax free! That is you will pay zero capital gains tax, zero income tax, and have no additional tax liability on this gain!

Consider that it could take you ten years or more to save $100K in your typical retirement fund and then you must pay ordinary income taxes when you withdraw those same funds years later.

What are the requirements to qualify for this most significant exclusion? The capital gain exemption on the sale of your home is limited to $250K for individuals and $500K for married couples. There are no rollover or reinvestment requirements, no minimum age requirements, and the exclusion can be used as many times as you like, but not more frequently than once in every two years. For the property to qualify as your primary residence, you must have owned the home for at least two years of the last five years and lived in the home as your primary residence for at least two years of the last five years.

Many ambitious homeowners have used this exclusion as their primary wealth creation strategy, particularly if you live in an appreciating area such as the west coast. If you sell your home every two years and realize a gain, you could continue to do this every two years indefinitely.

Here are some conservative numbers to consider: Your $350K home appreciates at a very reasonable 5% per year meaning after two years it is worth approximately $387K. Subtract out a 5% Realtor commission to sell the property, and you are left with an $18K tax free gain every two years. Do this every year two years for ten years and you have an additional $90K. Looking at this another way, increase your income by $9,000 per year every year for ten years by simply maximizing your primary residence exclusion.

You are always welcome to contact me to determine how to best incorporate your mortgage financing into your most advantageous financial strategy.

*The content of this newsletter is not to be construed as tax advice and will vary based on your unique circumstance, please consult your licensed tax preparer.

You can contact Jesse Knight, Principal Broker of the Realty Network/GMAC Realty at 971-219-4939 or jknight@therealtynetwork.net.