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Cap Gains Tax on Homes, Advice I Wish I Had Known and Taking Action

Brad
Posted by Brad Barrett

Capital Gains Tax on Primary Residence

Many of us have seen our homes increase in value significantly over the past few years, which for homeowners is obviously a great thing. I have a friend who is selling their home and they asked me how this appreciation would be taxed, and I realized this would be perfect for the FI Weekly:

As always, this is not tax advice as I can’t give you specific info for your life, but in general the US government gives us significant tax advantages for appreciated primary residences.

First, the gain is taxed as a "capital gain." If you’ve owned your home for less than a year, this is taxed as ordinary income, since it is a short term gain.  If a capital asset has been owned for more than a year it’s taxed at special long-term capital gains tax rates. For most taxpayers that’s a 15% Federal tax rate.

That’s beneficial, but where the magic comes in is with the ‘exclusion’ on cap gains tax for your primary residence.

For single filers, $250,000 of your appreciated gain is completely excluded (non-taxable) and for married filing joint that doubles to $500,000.

Critical note:  This must have been your primary residence that you lived in for a total of 2 of the previous 5 years to qualify for the exclusion.

Let’s assume a married couple bought a home in 2010 for $300,000, lived in it continuously, and it increased in value to $750,000 today.

They would normally have to pay tax on the $450,000 capital gain, but since they qualify for the exclusion, they pay ZERO dollars in Federal tax on this sale and the resulting gain.

Advice I Wish I Had Known

In what has become an annual segment in the FI Weekly, I linked up Kevin Kelly’s 68 Bits of Unsolicited Advice on My 68th Birthday article in 2020, and in 2021 his Additional 99 Bits of Unsolicited Advice.

This year on his 70th birthday, he’s back with 103 Bits of Advice I Wish I Had Known.

Some of my favorites:

  • Courtesy costs nothing. Lower the toilet seat after use. Let the people in the elevator exit before you enter. Return shopping carts to their designated areas. When you borrow something, return it better shape (filled up, cleaned) than when you got it.
  • Speak confidently as if you are right, but listen carefully as if you are wrong.
  • We tend to overestimate what we can do in a day, and underestimate what we can achieve in a decade. Miraculous things can be accomplished if you give it ten years. A long game will compound small gains to overcome even big mistakes.
  • Thank a teacher who changed your life.
  • For the best results with your children, spend only half the money you think you should, but double the time with them.

ChooseFI Community Taking Action This Week

  • Craig said, "Two years ago we had to cancel a carefully planned Disney World trip we booked with rewards points when everything shut down due to COVID. Fast forward to yesterday when I rebooked our Disney World trip for two weeks from now! All because of reward points I was able to fast track booking our hotel (the Swan Reserve), our airline tickets (JetBlue), and transfer the value left on our unused tickets from 2020. Nothing like booking a nearly $10,000 vacation risk free before even asking for PTO at work because you know that the rewards points and FI lifestyle give you the flexibility to! The FIRE is spreading!"
  • Anna said, "Thank you for a fantastic pod and newsletter. It is very fitting that this is the first email that I respond to sharing my 1% better. We are finally in the process of moving out of an Assets Under Management (AUM) account with a 1% fee with Morgan Stanley to Vanguard. Thank you and Jonathan for giving me the confidence and knowledge to do this. I found your pod 2 years ago and have implemented many of your suggestions but moving our money from an account a family friend of my husband managed was a big one."
  • Lauren said, "Thank you so much for the recent episode on taxes. The information helped me so much. We had a tough year in taxes for 2020. I took your advice on the abatement request and submitted a letter to our state tax office. They just confirmed this week that they removed $1200 in penalties! I would have never known about that process if you hadn't highlighted everything during that episode. Just a few minutes to write and mail that letter was worth so much. Your podcast has been such a wealth of knowledge. We are new to FI, but I know if we keep making these little changes we can get there faster than we realize."
  • Jared said, "My 1% was getting a brand new (to me) $450 tv for $39! Our apartment complex has a community donation center and someone left a 55" 4k TCL Roku TV with a sticky note on it saying "Works fine but needs a new backlight." I took it home and found the backlights on Amazon for $32, watched a YouTube video on how to fix it, and though the repair took me a few hours because I was super slow and nervous about breaking something, I got it up and running and it's in perfect condition! A new Roku remote cost $7 at Walmart, so for a total of $39 and a few hours of learning, we now have a high quality tv that's bigger than our old tv, and I have a new set of skills! Lifelong learning is a habit that we build every day, and it pays off!!"
  • Jodi said, "My 1% was actually 18.5%. As a middle aged female professional, I finally entered the 6 figure club. I was unexpectedly recruited by my former employer to come back when a colleague retired. Not only did I obtain the pay increase, but I went from being a program coordinator to a director. I finally feel like I'm hitting my stride after years of hard work in a male dominated industry. Persistence can pay off."
  • Larry said, "My 1% better this week was to do a search for unclaimed funds/dormant accounts to see if I had any "lost/unclaimed" money that I had forgotten about. I did a google search for "How to find dormant accounts in New York state" and found a link to the NY state comptroller's website. (I assume other states may have similar websites.) Although my name didn't come up in the search, I put in names of several of my friends and found three friends (out of the six or seven names I entered on the website) that were listed on the website. I let each of them know and they are currently checking to find out how much lost/unclaimed money they might have. I jokingly told them they owe me a 10% finder's fee. I'm not sure if any of my friends will be able to claim much in the way of lost funds but thought your readers/listeners might be interested in this tip." Brad note: I mentioned this back in October and there’s a link to all 50 state websites here.

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