It would be hard to find a podcast-hosting duo more totally invested in answering your financial questions than Alison Southwick and Robert Brokamp — they put “Answers” in the show’s name, for goodness’ sake! And this week, they’re at it again, combing through the Motley Fool Answers mailbag in search of conundrums to address for their listeners. But because three heads are better than two, for this episode, they’ve enlisted the help of Sean Gates, a financial planner with Motley Fool Wealth Management.
In this segment, listener Jason is selling his primary residence, and he’s not planning to buy another anytime soon. But he’s getting some conflicting information on whether the IRS is going to take a bite of his profits. Relax, Jason: Your gains are safe.
Sean Gates is an employee of Motley Fool Wealth Management, a separate, sister company of The Motley Fool, LLC. The views of Sean Gates and Motley Fool Wealth Management are not the views of The Motley Fool, LLC and should not be taken as such.
A full transcript follows the video.
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This video was recorded on June 26, 2018.
Alison Southwick: Next question comes from Jason. “I’m getting ready to sell my personal residence. Everyone around me assumes I’ll have to pay taxes unless I reinvest it in another home, but the IRS website says I can exclude up to $250,000 profit on the home if I meet this certain criteria, which I do. I’m not looking to buy another home anytime soon and would like to save the majority of the profit for the future, as well as some short-term use, like maxing out my Roth.” That’s adorable, that he calls maxing out his Roth a short-term use. [laughs] Oh, Jason, I love you! Sorry, last sentence. “Will I be able to keep the entire profit?”
Robert Brokamp: Generally speaking, it’s always better to believe the IRS website vs. your friends. In this case, the IRS website is true. It’s known as the home sale exclusion or section 121. Basically, you can exclude a profit of $250,000 or $500,000 if you’re married and you file jointly. There are some criteria that’s basically, the most important is, the house that you’re selling must have been your main home for at least two of the past five years, and that you haven’t claimed the home sale exclusion already during the past two years.
If you don’t meet that criteria, there are actually still some ways to get the exclusion at least partially. If you moved for job purposes, there’s some medical reasons, if you worked for some branches of the government. So, even if you don’t meet those criteria, dig a little deeper, you might at least get a partial exclusion.
What your friends are talking about is something for real estate investors — not your resident, but investors. That’s known as section 1031 or 1031 exchange. They’re thinking about rental properties. I think that’s where that’s coming from, but it doesn’t apply to your primary residence.
I think you’re on the right track in the sense that, if you don’t need the money any time soon, you can consider it as a longer-term investment type of thing. We’ve talked in previous episodes about how you actually can use money in your IRA to pay for another home eventually. That’s something to think about. If you were going to buy a home in the next year or two, I would say, play it pretty safe.
Then, my final piece of advice is, be aware that there are certain tax benefits to owning a home, deducting mortgage interest and property taxes. Once you sell the home, you won’t have that. Just be aware of how no longer owning a home is going to affect your tax bill.
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