One of your most important assets, if not your most important, is your investment in a home or investment property. Misunderstanding or a lack of knowledge of tax rules and laws can cause you unnecessary time and money.

Summarized below are some of the most important points of law as we approach the end of the year on real estate taxes and rules.

Exclusion of Gain from Sale of Principal Residence

  1. An individual may exclude from gross income up to $250,000 of gain ($500,000 for married filing joint return or surviving spouse) realized on sale or exchange of a principal residence.
  2. The owner must use and own the property for at least two years during the preceding five years and has not used the exclusion in the previous two years.
  3. A reduced exclusion is available if based on the facts and circumstances, the sale took place because of the taxpayer’s change in employment, health or unforeseen circumstances.
  4. The exclusion does not apply to any portion of the gain that is allocated to property not part of the principal residence. The sale is treated as two sales, one for the residence and one for the non-resident property. It is important to keep a separate accounting.
  5. These rules do not apply to a second home but only your principal residence.
  6. Any gain on the sale of your principal residence over the above limitations is taxed at ordinary income tax rates. In order to avoid income taxes on any gain over and above your exclusion amount, the taxpayer options are limited. Two ideas that have worked in the past is consideration of converting your principal residence to a rental and subsequently deferring the realized gain by engaging in a 1031 tax deferred exchange. Another option for remaining in your home, if you cannot afford the monthly and annual costs, is negotiating a reverse mortgage if you are 62 or older. The details are beyond the scope of this newsletter.

Deductibility of Home Equity Indebtedness

  1. The amount of qualified mortgage interest that may be deducted is limited to interest on the aggregate indebtedness that is not in excess of $1,000,000 ($500,000 for married filing separately). The aggregate amount of home equity indebtedness may not exceed $100,000 ($50,000 for married filing separately). Interest attributable to amounts over these is personal interest and non-deductible.
  2. A qualified residence includes the principal residence and an additional second home or vacation home that is not rented out.

Investments and Capital Gains (Losses)

  1. Gains on the sale of stocks, bonds and real estate not including your home or homes are taxed at capital gain rates and not ordinary income rates. After the election and next year expect the rates for both capital gains and income taxes to change.
  2. To determine the deductibility of capital losses, all capital gains and losses both long term and short term need to be totaled. Capital losses are only deductible to the extent of the capital gains plus an additional $3,000 based upon the current tax law ($1,500 for married filing separately).
  3. Keep track of all major improvements in your home so that you can add the amounts to your cost basis in order to minimize your gains. You can take deductions for depreciation on your investment properties that are improved.

Please contact me if you have any questions on the above or would like to estimate your taxes for 2016.

I have changed my accounting and tax e-mail address to chuck@chuckandersonaccounting.com

Please change your e-mail appointment book or files to this new address.

Phone number and website are still the same.

All the best,


Certified Financial Planner™, CFP®    

Chuck Anderson C.P.A, Inc.

Registered Representative offering securities and advisory services through Independent Financial Group, LLC (IFG), a registered broker-dealer and investment advisor. Member of FINRA/SIPC. Office of Supervisory Jurisdiction 848 Manhattan Beach Blvd., Manhattan Beach, CA 90266. Professional Business Services and IFG are not affiliated. For security-related issues email: canderson@ifgrr.com