Real Estate Market

Featured Listing

Featured Listing

For Sale: $2,950,000

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Market Trends for Ventura County

Market Trends for Ventura County

Supply and demand will always reveal the type of market conditions we are in. Today’s video will to show you some differences in the supply and demand issues for the 3 different price points. To help you see the differences we will look at the number of closed sales happening each month which will tell us how long the current inventory would be absorbed.

 

 

 

Personal Residence to Rental - The Super Tax Break

Did you know that you can avoid paying tax on more than $500,000 of gain on your home? Many people are aware of the advantages of Internal Revenue Code Section 121, which allows a married couple to exclude up to $500,000 of gain on the sale of their personal residence ($250,000 for a single taxpayer). Although this amount of gain is generous in most areas of the country, in some states homeowners receive more than $500,000 of profit when they sell their home.  That additional profit is subject to federal and state capital gains tax and net investment income tax (Medicare tax).

What is much less understood in the real estate world is that a homeowner can avoid paying all of the tax on their home by converting it to a rental. Once the home is converted to a rental, the owners can sell it and use both the Section 121 exclusion of gain and the Section 1031 deferral of gain provisions to exclude some of the gain and defer paying tax on the rest.  Most tax advisors recommend renting the home for at least two years to establish it as a rental, but if you rent it for too long, you could lose the ability to benefit from the Section 121 exclusion, since that provision requires that you have lived in the home as your primary residence at least two of the past five years.

For example:

John and Mary Smith have lived in their home for twenty years. They acquired it for $100,000 and it is now worth $1 million, so if sold, they would have $900,000 of gain. If they sell it without converting it to a rental, they would be able to exclude $500,000 of gain but would have to pay capital gains tax on the additional $400,000 of gain.

John and Mary decide, however, to convert their property to a rental. After renting it for two years, they sell it for $1 million. Since they used the home as their primary residence at least two of the past five years, they are able to exclude $500,000 of the gain. They can then use the remaining funds to acquire replacement investment property in a 1031 exchange and defer paying tax on the balance of the gain.  In order to accomplish this, they must set up the 1031 exchange prior to closing on the sale of the property.

In order to completely defer the remaining gain, the traditional rule is that the investor must acquire replacement property with a fair market value equal to or greater than the relinquished property, and must invest all of the equity from the relinquished property into the replacement property. When gain has been excluded under Section 121, however, the amount of value and equity required to invest in the replacement property is reduced by the amount of gain that was excluded under Section 121.

Homeowners who decide to combine a sale of their primary residence with a 1031 exchange need to comply with all of the rules of Sections 121 and 1031 in order for this to work. Revenue Procedure 2005-14 explains how the two statutes may be combined for one property. This ruling includes not only the situation mentioned above, but also a sale of a personal residence with a home office or separate guest house that is rented.

Some of the requirements to keep in mind are:

  • To take advantage of the $500,000 exclusion ($250,000 for single Taxpayers), you must own and live in your home as your primary residence at least two of the past five years;
  • You can only take advantage of the Section 121 exclusion once every two years;
  • Section 121 doesn't allow you to exclude any gain attributable to depreciation deductions taken since May 6, 1997, but that gain can be deferred under Section 1031; and
  • To take advantage of the deferral of gain under Section 1031, the property you sell and the property you acquire must at the time of the exchange be used in connection with your business or held for investment.

This article discusses some general concepts, but you should consult with your tax advisor

 

Tips for Sellers

When preparing your home for sale, a number of simple cosmetic changes often provide the biggest return on investment. Here are three tips to upgrade your house without breaking the bank:

  • Bring in the light. The right light creates the right mood. Adding lights to dark rooms can make your home feel warm and inviting. Bring outdoor light inside by opening curtains and installing economical suntubes.
  • Create Space. Many of today's buyers are looking for open rooms. Consider removing unwanted walls to make your home feel more spacious. Buyers will often pay a premium to get a bit of extra room.
  • Replace Flooring. Get rid of that old carpet in the den and replace it with today's newer hardwoods and laminates. You don't have to spend a lot to make a big impression!

These simple tips can help you sell your home and take advantage of today's market. Please contact us if you have any questions about selling your home. We are here to help!

Contact Information

Photo of Harold Powell Real Estate
Harold Powell
RE/MAX Gold Coast Realtors
5720 Ralston St. Ste. 100
Ventura CA 93003
(805) 339-3516