Some homeowners, who were not able to sell during the recession, chose to rent their homes instead. In some cases, they didn’t need to sell their home at the depressed prices and opted to rent it until the market recovered.
It’s a valid strategy but there are time restrictions that could have serious tax implications for some homeowners.
The section 121 exclusion for gain in a principal residence requires that the home is owned and used as a main home for at least two years during the five year period ending on the date of the sale. This allows a homeowner to rent their home for up to three years and still have some part of the exclusion available.
The sale of a home with a $200,000 gain that qualifies as a principal residence would result in no tax being paid by the owner. Comparably, a rental property with the same gain could have a $30,000 or higher tax liability depending on the length of ownership and tax brackets of the investor.
The housing market has dramatically improved in the last year. If you have a gain in a home that has been your principal residence and it has been rented less than three years, you might want to consider selling it while you qualify for the exclusion.
If you are considering a sale on your principal residence that has been rented, consult with your tax professional for advice on your specific situation. For additional information, see IRS Publication 523.
Another Exceptional Home Listing of The Cockrill, Rosko-Thomas Group with Coldwell Banker Residential Brokerage in Annapolis, MD, listed by Charles Cockrill
Another Exceptional Home Listing video by the Cockrill, Rosko-Thomas Group listed by Susan Rosko-Thomas.
Another exceptional home listing by the Cockrill, Rosko-Thomas Group listed by Charles Cockrill, Coldwell Banker Residential Brokerage.
Low inventory is a relative term depending on how you’re comparing it. Would the comparison be to total number of homes on the market last year, homes in a certain price range or homes in a certain area? In some situations, it’s a combination of all of those things.
any given market, inventories will fluctuate based on area and price range. The National Association of REALTORS® considers a balanced market to be six months’ supply of homes. If it takes longer than six months to sell, it is thought to be a buyer’s market and less than six months, a seller’s market. Most buyers and sellers probably feel inventory equilibrium is more like three month’s supply of homes.
Inventory has a direct impact on price. During the housing bubble, demand decreased, supply ballooned to four million houses and prices dropped dramatically. Increased inventories due to foreclosures, bank’ revised lending practices and builder’s lack of new housing starts each contributed to the dramatically lower prices.
As the market has recovered, economic conditions have improved, banks have loosened their requirements, interest rates have remained low, foreclosures have slowed and gradually, the inventory has been reduced to approximately two million houses. When demand is constant but inventory is reduced, price tends to increase because the same number of people are trying to buy a smaller than normal number of homes.
Based on the low mortgage rates that have been inching up each week in 2013 and an improving consumer confidence level, most markets are experiencing some increase in demand. With inventory decreasing, buyers in the marketplace can see that prices are increasing.
Just as signs of spring can be seen to be just around the corner, it should be recognized what direction prices will be moving. Hindsight is 20/20 but we can’t purchase or sell in the past. We need to make decisions today on what we think will happen in the future.