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Money Girl
162 MG Selling Your Home Sweet Home
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Today's topic was inspired by several emails I've received recently about selling real estate, like this one from Jim who asks, "I have a house on 40 acres that I've lived in for 35 years and I'm thinking of selling. Do I have to pay any capital gains? A house and property are worth about $175,000. One of the ways the government encourages home ownership, or any activity for that matter, is by giving us tax incentives. Tax incentives are great because they allow you to keep more of your money instead of paying it to the government. One of the biggest breaks you can get becomes an option when you sell your primary residence, and it has to do with what Jim mentioned, capital gains. So let's start off by briefly discussing capital gains and losses. You know that you have to pay tax on income from your job, business, or interest you receive from a bank account, for instance. That's called ordinary income, but you also have to pay tax on profit you make from an investment. That's called a capital gain. A capital gain occurs when you sell a capital asset for more than what it costs you. And a capital loss is, you guessed it, money you lose on the sale of a capital asset. Real estate, stocks, mutual funds, and many other types of investments are capital assets. When you make a profit from buying them low and selling them high, bravo. You just created a capital gain. But what about capital losses? You can offset most capital losses against your capital gains to reduce your tax liability. But unfortunately, that's not the case with the loss from the sale of your main home. And that's a question I get frequently, so I want to make sure you understand that when you lose money on the sale of your primary residence, it can't be written off or deducted from your taxable income. When you take the difference between the amount you realize from your home sale and the adjusted basis or cost, you've calculated the gain or loss. It can be a little complicated, so instead of going into the details here, I'll refer you to the worksheets found in IRS publication 523. You'll find a link to that publication on the blog at moneygirl.quickandertytips.com. If the amount you realize from a home sale is more than your investment in the property, then you have a gain. For example, if you realized $215,000 on the sale of your home and your adjusted basis is $200,000, then you created a capital gain of $15,000. But if your basis is less than what you realized, you have a loss that is not tax deductible. Even though a capital gain is taxable, the good news is that you can generally exclude all or a part of the gain on the sale of your main home from tax. So how much gain can you make disappear? Well, it's a pretty big chunk of change, up to $250,000. Or if you're married and file a joint tax return, you can exclude up to $500,000 of gain. A widow or widower who didn't remarry before selling their home also generally qualifies to exclude up to $500,000. The requirements you have to meet to be eligible for the home sale capital gain exclusion are pretty simple. You must have owned the home and used it as your main residence for at least two of the five years that preceded the sale. The requirement is extended to two of the previous 10 years if you or your spouse are eligible government employees or in the military or work for the Peace Corps. September is a great month for planning. We start thinking about the rest of the year, whether it's back to school, big year-end work projects, holiday plans or travel, planning ahead is crucial in life, especially when it comes to what happens when you're gone. Getting life insurance may sound daunting, but Policy Genius makes the process a breeze. With Policy Genius, you can find insurance policies that start at just $292 a year for a million dollars of coverage. 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Become a member at walmartplus.com, $35 order minimum, Paramount Plus essential plan only, separate registration required, valid participating USB Ks and the BKF while BK.com remembers only 25% off one time per calendar day, terms apply, see Walmart Plus terms and conditions. My dad works in B2B marketing. He came by my school for career day and said he was a big row as man. Then he told everyone how much he loved calculating his return on ad spend. My friends still laughing at me to this day. Not everyone gets B2B, but with LinkedIn, you'll be able to reach people who do. Get $100 credit on your next ad campaign. Go to linkedin.com/results to claim your credit. That's linkedin.com/results. Terms and conditions apply. Linkedin, the place to be, to be. You can only claim one primary residence at a time, even if you own more than one home. It can be a house, condo, co-op, mobile home, or even a houseboat. A really great part of the capital gains exemption for home sales is that there's no limit on the number of times you can take it in your lifetime. Since you have to live in the home for a minimum of two years to qualify, theoretically, you could reap a tax-free gain every two years if you were willing to sell, buy, and relocate that often. It sounds like a good strategy, but just the thought of moving that often exhausts me. If you don't meet the requirements to qualify for the capital gains exclusion, you may still qualify for a partial exclusion. That might be the case if you had to sell your home due to poor health, to relocate more than 50 miles away for a new job, or for other unforeseen circumstances, such as becoming unemployed or getting divorced, for instance. But you'll have to pay capital gains tax on any amount of gain that you can't exclude. A capital gain is taxed differently from ordinary income. It's also taxed differently depending on how long you own the asset that was sold. Ownership for a year or less makes the transaction a short-term gain. And if you own the asset for more than a year, it's considered a long-term gain. Tax rates for short-term capital gains are the same as the rates for ordinary income. But long-term gains get very favorable tax treatment. You pay much less tax for a long-term capital gain than for the same amount of ordinary income. For 2010, the highest tax rate for a long-term capital gain is 15%, but the highest rate for ordinary income goes up to 35%. And the lowest tax rate for a long-term capital gain is actually zero if you're in one of the two lowest tax brackets. Tax rates for both ordinary income and capital gains are projected to increase after 2010. So be sure to check taxfoundation.org for current information. So congratulations go to Jim since he lived in his home for more than two years. And the gain on the sale of a property worth 175,000 would be less than the $250,000 maximum exclusion. He won't have to pay any capital gains tax on the sale of his property. And I have a quick favor to ask. Please take a moment to complete our listener survey. Head over to quickenertytips.com and click on the blue listener survey button that's at the bottom of the right sidebar on every page. We want to know more about you. And while you're there, become a fan of the money girl Facebook page so you can get show notices, more money tips, and updates from me. I'm glad you're listening. That's all for now. Courtesy of Money Girl. Your guide to our richer life. [Music] Walmart Plus. It's Walmart Plus Free Delivery. Which saves members time plus money. Yep. Plus an included Paramount Plus subscription to stream movies, show sports, and that can't miss documentary. Plus Burger King savings. That's right. Members get 25% off Burger King Digital Orders every day of the week. Walmart Plus. 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