Retirement & Financial Planning Report

Your home not only shelters you from the weather and from intruders, it can serve as a powerful tax shelter.


Capital Gains Exclusion

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Married couples filing jointly can exclude up to $500,000 worth of gains on home sales; for individuals, the limit is $250,000.


Suppose you and your spouse bought a house years ago for $200,000 and ultimately sell it for $600,000. That’s a $400,000 gain yet you’ll owe not a penny to Uncle Sam.


With a tax break this valuable, you should pay attention to the rules. Suppose, for example, you intend to get married; both you and your spouse own homes so you plan to sell one. If the house you’d sell has appreciated more than $250,000 you may want to wait until after the marriage to sell, in order to get the $500,000 exclusion.


This exclusion is not a once-in-a-lifetime tax break. That is, you can use the $250,000 or $500,000 exclusion once every two years, no matter what your age. Generally, the requirements are that you must have owned and occupied your home as a principal residence for at least two out of the five years prior to the sale.


You might sell an appreciated primary residence, pocket tax-free proceeds, and move into what had been a vacation home. After living there for two years you can sell this home, too, and claim an exclusion.


Medical Deductions


You may be entitled to an immediate deduction for capital improvements to your home if the capital improvement is made to alleviate a specific health condition.

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Suppose your doctor tells you to install central air-conditioning to help you cope with asthma, allergies or respiratory problems. If you have arthritis, a daily swim might be prescribed, requiring the installation of a pool. Alternatively, an elevator might be deemed necessary if someone in your household has a heart condition.


In these or similar circumstances, get before-and-after appraisals. The amount you spend that does NOT increase your home’s value becomes a medical deduction.


Suppose, for example, you spent $40,000 installing central air-conditioning. Your local real estate agent provides a written appraisal, saying that your house, which was worth $260,000 previously, is now worth $275,000 as a result of the improvement. If you spend $40,000 and your house appreciated by $15,000, the $25,000 difference can be used as an itemized medical deduction. Moreover, ongoing operation and maintenance costs also may qualify as medical expenses, in subsequent years.


For the best tax results, get a written recommendation from your doctor, stating the reasons the improvement was necessary (not just desirable) to treat a specific condition, as well as before-and-after real estate appraisals.

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