Financial Planners often focus on developing tax-free cash flow streams in order to manage taxes during retirement. While many mention the Roth IRA, few talk about the benefits you can receive by downsizing your home and moving into a lower priced one. How can one get tax-free income from downsizing? If you have met certain requirements, up to $500,000 of the gain you realize on the sale of your current residence can be tax-free. The IRS suggests that you keep the following tips in mind when contemplating a home sale:
1. You and your spouse each area allowed a $250,000 capital gains exclusion when you sell your home.
2. To qualify for this exclusion, you must have lived in the home at least two out of the last five years.
3. You must have used the home as your main residence.
4. If your capital gain does not exceed your exclusion, you do not need to report any gain on your tax return.
5. If your capital gain exceeds your exclusion, you then must file the capital gain on Schedule D of your 1040 return. You will only be taxed on the gain that exceeds your exclusion. Currently, the maximum tax for long term capital gains is 15%.
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