If you own and live in your home for two of the last five years before you sell, then up to $250,000 of your profit is tax-free for a single person and up to $500,000 if you are married and file a joint return. It is important to keep this tax benefit in mind if you are thinking about selling; as many people get stuck paying capital gains taxes that could have been avoided with better planning.

 I was at a closing, representing the buyer, and when the closer asked the seller if she had lived in the home at least 2 out of the past 5 years and seller proudly said, “our 2-year anniversary is in 2 days!” The closer informed the seller that she would have to report the sale to the IRS. The property was previously purchased from a bank and the seller realized a $75,000 profit which she would have to pay capital gains tax on. This could have been avoided if she closed 2 days later. Neither the seller or her real estate agent asked to have the closing delayed, which may or may not have been agreed to.

 One of my sellers received the house as part of a divorce settlement and the house was valued at $1,000,000 at the time of the divorce. They owned the house for 25 years and originally paid $150,000 for it. When she decided to sell it, the market had dropped and the house sold for $650,000. Because she was now single, she could only use the $250,000 deduction and she had a $500,000 gain. We put together a list of improvements that had been made to the property over the years and came up with about $100,000 which reduced the gain to $400,000. Then we structured the sale on a contract for deed to defer the gain. We consulted with her financial planner before finalizing the contract. In hindsight, she wished the house would have been sold before the divorce was finalized so they would have known the actual value and they could have used the $500,000 exemption.

 Another seller of mine bought a cabin for $15,000 many years ago and it is now worth $400,000. His spouse died a few years ago, so he must pay the capital gains tax over the $250,000 exemption. Even though he could have avoided the taxes and used the $500,000 exemption if he sold it sooner, he enjoyed living on the lake and sharing it with his family.

A professional real estate agent and a financial planner can analyze your situation to help you decide the best time to sell your home.

Ask the Real Estate Agent is a weekly column by Cheryl Kempenich of Coldwell Banker Burnet, who lives and offices in the Chisago Lakes Area. Submit your questions to ckempenich@cbburnet.com. All information is deemed reliable but not guaranteed. For legal assistance consult an attorney.