Own Your Home? Follow These Tips

The following is a modified excerpt from my recently published book, “100 Tips for Having a Champagne Retirement on a Shoestring Budget”, which was a collaboration among all of my associates. 

Tip #14: Share Home Maintenance Tools

Consider splitting the cost of a high-priced home maintenance tools that you rarely use. A few years ago, my husband had to spend hours in the yard every weekend to keep up with the endless barrage of leaves in our yard. With a newborn at home, time together as a family was precious. He really wanted a “backpack” leaf blower which would be more powerful and efficient because of the layout and size of our yard, but that wasn’t in the budget. Ultimately, he and a friend in our neighborhood decided to share a nice blower. They split the cost and drastically reduced the amount of time spent working in the yard each weekend.

Contributor: Beth Moody, CFP®

Tip #15: Avoid Capital Gains

Most everyone knows about the tax benefits that come with home ownership such as the deductions for mortgage interest and property taxes. However, the break that has the potential to offer the most benefit often goes unmentioned—the capital gains exclusion when you sell your home. The exclusion allows for you to make up to $250,000 ($500,000 if you file a joint return with your spouse) on the sale of your home and not pay any capital gains tax. To qualify for the exclusion, there are two caveats to be aware of; the home you are selling had to have been your primary residence for at least 2 out of the last 5 years and you had to have owned it during that period.

For example, if a couple purchased a home 22 months ago and sold it for a gain, their entire gain would be a taxable capital gain. If the couple had waited an additional 2 more months until they sold it, they would have been able to exclude the entire gain and have no tax liability on the sale!

Practically speaking, this exclusion will likely come into play for individuals who have either owned their home for a long period of time (over which, housing prices have risen), or for people who have done renovations to their home that subsequently improved their home’s value.

Contributor: Brett Norris 

Tip #16: Keep Up With Receipts (From Renovation Costs)

Obviously, any capital improvement to your home should theoretically improve its value correspondingly. That said, it’s important to keep up with the costs associated with any improvement because they count towards your adjusted cost basis in your home, which can potentially play a big factor in how much tax you owe down the road.

For example, let’s assume Jim has a home budget of $400,000. Instead of using all of his money on a brand-new house, he decides to buy a ‘fixer-upper’. He buys the home for $300,000 and then spends another $100,000 on renovations for an adjusted cost basis of $400,000. Several years later, Jim sells his house for $650,000, which means he has a capital gain of $250,000 ($650,000 sale price minus the $400,000 adjusted cost basis). Assuming he qualifies for capital gains exclusion on the sale of his residence, he owes no tax (he is single and gets an automatic $250,000 exclusion). If he had not kept up with his receipts for the $100,000 spent on improvements, his $100,000 adjustment to his cost basis would have been disallowed. This means that his cost basis would have been $300,000 and his reported gain on the sale would be $350,000, resulting in a capital gain of $100,000 (after the $250,000 exclusion).

Contributor: Brett Norris