DISCLAIMER – I am not a tax accountant or an expert on taxes. Always seek the qualified opinion of a tax expert. Don’t take my word on any tax related issues as your holy grail of information. Please, CYA and research. That said….
Some of you may know that I recently took a tax class. It was very exciting. Well, no… but I learned a lot of new stuff, which is always neat =D While in class, I learned about this rule that’s going to change regarding deductions when selling your primary residence. You may have heard about this too …in case you didn’t I’m going to give you a heads up so that you can look into it. Especially look into this change if you plan on selling your primary residence/taking a primary residence capital gains deduction any time soon.
It is my understanding that the guidelines under the primary residence deduction will change coming December 31st ‘08/Jan 1st ‘09…. Traditionally, this deduction was utilized when someone or a married couple sold their primary residence and made a capital gain. They could potentially use this standard deduction to decrease the amount of gain that they were taxed on. The person or couple had to live in their property and declare it their primary residence any 2 out of the last 5 years. Then, if the property was sold, a single person could deduct 250k or a married couple could deduct 500k from their capital gains. (ex. A married couple bought a home for 100k. They rent it for a year, live in it as their primary residence for two years…and rent it for another year (total time lived there in last 5 or less years = 2 years). Then, they sell it for 650k. They are taxed on 50k as a capital gain.) This rule will change starting Jan 1st-ish of ‘09.
People will still be able to deduct something from their primary residence. …and the max amount will still be 250k for a single person or 500k for a married couple. However, it will not have the same time constraints and the deduction will not be fixed, but capped at 250k or 500k. The rule, so far as people know, says that you still have to live there at least two years out of the last 5…. But…… the amount of deduction will be a ratio where the denominator is how many years you’ve owned the home, and the numerator is how many years you’ve lived there. You take that ratio and multiple that by 250k for a single person, or 500k for a married couple. That will determine the deduction you can take. (Under this new rule, the married couple from our above example would be taxed like this: 2/4 = .5 x 500k = 250k. …they will be taxed on 300k.) That’s a significant difference. Therefore, if you plan on selling your primary residence/taking a primary residence capital gains deduction any time soon, figure out how this rule will affect you and PLAN AHEAD. I know, there’s not a lot of time left. The government is sneaky like that. If you need help mobilizing, contact me and I’ll get you covered!