Personal finance, like golf, is “deceptively simple and endlessly complicated”.

Since the crash of 2008/2009 our economy has gone through a metamorphosis. We have all had to tighten our belts, spend less than we make, save for retirement, fear another crash and become timid with our investment decisions, relocate for jobs, etc. If you now find yourself in the position to actually think about selling your home, consider some of these key items. I doubt your real estate broker will be looking this deep into your situation.

The first item to think about is whether you are going to profit more than the exemption. For married taxpayers filing jointly, the maximum amount of this profit (realized gain) that may be excluded from gross income is $500,000. Wow, that seems like a lot. But consider this.

Freddie Fairways, age 45 and single due to golfing addictions, has owned and lived in his home for three years. He made a great investment after the fall out in home prices. He paid $75,000, as the market found the bottom, and recently sold for $375,000. There needed to be some things done to improve the home over the years ($20,000 porch and $5,000 deck). He incurred a broker’s commission of $9,000 on the sale. What is the recognized gain and what is the realized gain?

Selling price of old residence:  $375,000
Less selling expenses: ($9,000)
Less adjusted basis of old residence:  ($100,000)
Realized gain (schedule D):  $266,000
Less $250,000 exclusion (single):  ($250,000)
Recognized gain (schedule D): $16,000

Why is the schedule D so important? If Freddie also has a loss sitting in his stock portfolio of $30,000 he can sell the stock for a loss. Gains can be netted against losses on schedule D. In other words, he won’t be paying taxes on the $16,000 recognized gain.

One thing to remember when claiming the $250,000 exclusion ($500,000 married filing jointly) is that you had to live in the home as a primary residence for at least 2 of the last 5 years preceding the date of sale.

An exception is available if a taxpayer lives in the residence less than the two years and moves because of a new job, for health reasons, or “unforeseen circumstances” like marriage! Be careful, there is a 50 mile rule here as well. Less than 50 miles, the exception does not apply.

If you plan to sell a home this year make sure you’ve done all of your homework before the end of 2015.

While investing can also feel both rewarding and maddening at times, remember that “staying the course” when it comes to your investment strategy may help lead to winning results over the long run. You could save thousands of dollars with a simple phone call to B P Financial Associates. Give us a call today.

Blake Parrish
Senior VP, Portfolio Manager
Phone: (503) 619-7237
E-mail: blake@bpfinancialassoc.com