Q: My wife and I have lived in the same house for the past 21 years, but now we are planning to sell it and then rent a home in a retirement community. Can we still keep up to $500,000 in our resale profit tax-free, or is this tax break only available to people who buy another house instead of renting one?
A: Don’t worry. All of your resale profit likely will be tax-free.
Internal Revenue Code 121 allows most married couples who file their taxes jointly to keep up to $500,000 of their home-resale profit away from the clutches of the IRS. Single tax-filers can keep up to $250,000.
You don’t need to buy another house to qualify for this big tax break — renting a new place would be OK — as long as you meet the IRS’ “residency rule.” It requires that sellers who want to keep their profit tax-free must have used their old home as their personal residence for at least 24 months in the previous five years before the sale.
Your letter states that you and your spouse have lived in your current home for more than two decades, so you obviously meet this important guideline. Discuss your personal situation with an accountant or other tax professional for more details.
You recently wrote that all home buyers should include a “financing contingency” in their purchase agreement so they can get their sales deposit back if their loan application is not approved. My husband and I recently visited a lender and were pre-approved for a $275,000 loan, and now we have found a house that we would like to buy for only $254,000. Is a financing contingency still required?
A financing contingency is never required in a purchase offer, but it is always advisable to include one — even for buyers who get pre-approved for a mortgage before they begin hunting for a new home.
Most real estate deals today include such a contingency, which allows buyers to cancel a sale and get their deposit back if their mortgage application is not approved.
Even though your bank has pre-approved a mortgage for you to buy a house, it has the legal right to cancel its decision and deny the loan for any number of reasons — including the loss of a job, a sudden illness that leaves you unable to work or even the mere filing of a groundless lawsuit that could tie up your personal assets in court.
With home values still dropping in many parts of the nation, it’s also important for you to realize that the bank can yank your pre-approval if you sign a contract to buy a house but the appraiser then determines that the property is worth less than you agreed to pay.
After considering all these potential pitfalls, savvy buyers always include a financing contingency in their purchase offers to protect their good-faith deposits.