To qualify for the homeowner’s tax deferral, you are not required to reinvest any of your profit from the sale of your old home in the new home, only to buy a home of equal or greater value.
Therefore, when you sell your home, use the profits in a powerful investment program that will earn more than the interest you would pay on a home mortgage. Buy your new home using as big a mortgage as possible.
Let’s look at the home sale of Martin and Marie Jones of Kansas City to see how the tax deferral process actually works.
The Joneses sell their home for $110,000. They originally purchased the home eight years ago for $65,000. The presale fix-up expenses were $1,000, and they paid Jacob Realty $7,000 in commissions for selling the home. Their new home costs $120,000, so, using the homeowner’s tax deferral rules, there is no taxable gain on the sale of their old home. They are able to defer or postpone the taxes on their profit of $38,000 ($110,000 sale price — $7,000 commission — $65,000 cost $38,000 cash profit).
The Joneses report the transactions involving the sale of the old residence and purchase of their new residence on tax form 2119 in order to qualify for the homeowner’s tax deferral. See the sample form on page 321.
On their new $120,000 home the Joneses can either make a down payment using the $38,000 profit from the first home or make a minimum down payment of $12,000. In either case the fixed interest rate is 10%. What should they do?
The correct strategy in real estate is to maximize your cash available for more liquid investments. Real estate ties up your money long term. The Joneses should take the $26,000 difference in the down payments and invest the money in mutual funds or discounted mortgages that will return 20% or more. The difference in mortgage payments can be made using part of the investment income. At a 20% investment return, the $26,000 will generate $5,200 while the $26,000 extra mortgage amount will cost only $2,600 per year in tax deductible interest.
Tags: Buy your new home, liquid investments, money long term, mortgage, powerful investment program, sale your home, sell your home, The correct strategy in real estate