In this market, many equity sellers do not want to compete against the banks and short sale sellers who price their properties aggressively under market to secure a fast sale. Instead of selling their home to buy a home one, they decide to rent out their current home.
Let's say a married couple purchased their home in 1995 for $300,000. Today's it's worth $500,000. Should they meet the tests, they may be eligible to exclude the entire $200,000 gain from their income. One requirement is that the house must be their primary residence for 2 of the last 5 years. By converting a primary residence into investment property for three years, this test is not met and the entire gain at the time of a subsequent sale will be subject to capital gains tax. Ouch!
The complete rules can be found at http://www.irs.gov/publications/p523/ar02.html
Further to this issue is the expectation that prices may continue to decline for the next three years as we work through the shadow inventory of distressed properties. In other words, homeowners thinking they can rent their home for a few years, will likely be in a worse position and forced to either sell for less than today's value or move back into their previous home.
As such, homeowners sitting on a capital gain on their primary residence should consider the strategy of selling their main residence, excluding their gain, buying a new house at historically low interest rates and buying a different investment property for long term growth.
The counseling team with Re-Create The Dream consists of a bank negotiator and CPA available by appointment to review all possible options and help homeowners execute a strategy that leads them closer to their long term equity and investment goals. The one-hour consultation is free of charge. For homeowners who are candidates for a loan modification, the bank negotiator will also handle the modification free of charge.
To schedule your appointment, contact Nancy Moeller at 714 276-7006.
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