By PETER ROSENTHAL, President
V.I.P. Trust Deed Company
Over the years your parents, the District Attorney’s office, consumer affairs reporters and the V.I.P. have warned you that if a deal seems too good to be true–It is! Watch out for frauds, swindles and cons that are just too good to be true.
Well, the IRS gave homeowners a present in 1997 (the Tax Relief Act of 1997) that was, frankly, too good to be true. When I first heard about it, I really couldn’t believe it. The “gift” is simply that homeowners who have owned their home for more than two years can simply sell the property and keep–TAX FREE–any profit derived from that sale up to $250,000 per person or $500,000 TAX FREE for the typical married couple. This IRS present can be used over and over and over gain. The reason that this is so remarkable and, frankly, unbelievable, is that the previous regulation was once in a lifetime, only available to homeowners 55 and older with a 5-7 year residency, and only $125,000. Remember, I said once in a lifetime. The present regulation is continuously available over and over and over. I have just celebrated my 60th birthday and, frankly, in all my adult years I have never known the IRS to give anybody anything. Actually, this was a Congressional gift.
It might seem strange that I would devote a column to “old news.” This exemption and “too good to be true deal” has now been available for the last two years. I am devoting this space as a REMINDER that homeowners have this wonderful opportunity available and with proper planning this can be a wonderful tool to increase one’s income in a truly tax free method. Many of the real estate tools, such as the investment property 1031 Tax Deferred Exchange, are tools to DEFER taxes.
This gift is “for real” and should be seriously considered with your accountant or CPA. It is the perfect vehicle for down-sizing as you reach maturity with no fear of capital gains and also the perfect opportunity for “up-sizing” for the younger generation with a home and equity buildup. Yes, previous and present regulations allow for “up-sizing” with no taxable results, but this new regulation is easier to work with.
This article actually has a two-fold purpose. It is definitely intended as a REMINDER to review this with your tax professional and, more importantly, warn you that “all good things come to an end.” When this first came out, I stated VERY LOUDLY that this would be modified immediately. Congress is presently working on a modification to this. As I understand the modification at present, it will merely extend the holding period from two years to five years. This is still one heck of a positive change from the old law. Depending on your length of ownership, you may want to take advantage of it now. Again, check with your tax advisor.
In closing, let me make one last observation. I often come across (after it is too late) terrible situations involving “do it yourself” wills, horrible business decisions, horrible medical decisions and, in this case, horrible tax planning decisions made by people who wouldn’t think of making an appointment with a real estate broker, CPA, attorney or second opinion doctor. Instead of paying $200-$300 for a professional consultation on the subject, people unwittingly subject themselves or their heirs to tens of thousands or hundreds of thousands of dollars of ill fated tax planning, business decisions, medical decisions, etc. When in doubt, ask a professional. Just a word to the wise.
Peter Rosenthal
VIP Trust Deed Company