Every financial investor wants the highest returns for the lowest amount of risk. But no matter how much risk you accept or how much you earn, there’s one thing you can count on: all profit will be subject to capital gains taxes of 15 percent.
That is, unless you invest in real estate.
How would you like to make $500,000 tax free? It’s possible only in real estate, thanks to the Taxpayer Relief Act of 1997. When you sell your home, you can legally walk away with up to half a million dollars and not pay a penny to Uncle Sam.
Now. . .there are some rules and limitations. A taxpayer must have owned the home for at least two years and used it as a primary residence for two of the last five years. If you own more than one property, your primary residence is where you live the majority of the year. Individual sellers can exclude the first $250,000 in profits from taxes, while married couples that file jointly can exclude $500,000.
Here’s an example: Joe and Suzie purchased a single family home for $200,000 as their primary residence. Five years later they sold it for $750,000 and paid nothing in taxes. Yes, it looks like they made $550,000 more than the purchase price, and I realize I said only $500,000 would be tax free—but another amazing advantage of real estate is that expenses are taken out before taxes.
Since expenses can include the cost of selling the property (agent commissions) and any improvements made to the house for the sale, that can be a lot of money.
In this example Joe and Suzie deducted the selling cost ($37,500 ~ 5% agent commission) and their roof replacement ($12,500). This totaled $50,000 and reduced their profit from $550,000 to $500,000 which they took completely tax free.
When it comes to real estate, your home can truly be an incredible shelter for both you and your pocket book. And the beauty of this investment strategy is that it can be repeated indefinitely every two years. Naturally, make sure to talk with a CPA or tax adviser regarding your individual situation.
Peter Stewart is a licensed real estate broker in Portland, Oregon as well as a frequent contributing writer for OHM. Please don't hesitate to contact him with any questions you may have about buying or selling a home in the Portland area.