Compliments of Our Law Firm,
Written By: The American Academy of Estate Planning Attorneys
For most people, owning a home is part of the American dream. Purchasing your dream home could also be the single biggest purchase you make during the course of your lifetime. If all goes as planned, that investment will even pay off down the road as you build equity in your home and the home appreciates in value. But did you know your home may also provide you with hidden benefits in areas such as tax avoidance, estate planning, and asset protection?
Traditional Benefits of Home Ownership
People purchase a home for both emotional and practical reasons. From an emotional perspective, home is where the heart is. Knowing you own your home turns the simple roof over your head into your own private retreat. Home is where you escape from the rest of the world, where you feel safe and secure. From a practical standpoint, real property has long been considered a sound long-term investment because most residential real estate will appreciate, on average, 3 to 5 percent per year. Though the real estate market can suffer downturns, it turns around eventually, which is why real estate is best as part of your long-term investment plan. These benefits to home ownership are well known. What you may not know are some of the other ways in which owning a home may benefit you.
Tax Advantages of Owning a Home
Capital gains taxes are incurred when you sell a “capital” asset, including real property, and you make a profit from the sale. For example, if you purchased real property for $200,000, and later sold it for $300,000, capital gains taxes would normally be levied on the $100,000 gain you realized from the sale. Your primary residence, however, is an exception. If your home qualifies, you may exclude up to $250,000 of gain (or up to $500,000 if married) from the sale if the following conditions are met:
- You owned the home and used it as your primary residence during at least two of the last five years before the date of sale.
You did not acquire the home through a like-kind exchange (also known as a 1031 exchange), during the past five years.
You did not claim any exclusion for the sale of a home that occurred during a two-year period ending on the date of the sale of the home, the gain from which you now want to exclude.
- Asset Protection Benefits of Home Ownership
Although you may not realize it, your assets could be at risk from a number of threats. One asset, however, that is often protected is a home. Most states, for example, offer a “homestead exemption” in bankruptcy that allows a debtor to protect a certain amount of equity in a home from creditor claims. Several states, such as Florida and Texas, offer an unlimited homestead exemption, offering debtors the ability to protect all the equity in a home, regardless of the value of the home.
The manner in which a home is titled can also offer additional protection from creditors. In states recognizing “tenancy-by-the-entirety” ownership between spouses, for instance, a creditor of one spouse cannot force a sale of the home to pay off the debt. Furthermore, a debt incurred to purchase a home is considered “non-recourse debt” in California, meaning the debt cannot be collected from other assets in the event of default.
Estate Planning Benefits of Home Ownership
For many people, their home is among their most valuable estate assets. As such, it plays an important role in their estate plan. One of the primary goals of estate planning is to limit the impact of state and federal taxes on the transfer of wealth. A Qualified Personal Residence Trust, or “QPRT,” allows you to make a gift of an interest in your home to your children or others. If your home grows in value faster than the interest rate assumed by the IRS, the additional growth is passed down estate and gift tax-free. Also, during the term of the QPRT, you are able to continue living in the home.
Medicaid, Financial Aid, and Assistance Programs
Most state and federal assistance programs limit the income and resources an applicant may have in order to qualify for benefits. Fortunately, your home is often excluded. As a senior, for example, you may find you need to qualify for Medicaid to cover the high cost of long-term care. To qualify for Medicaid, however, you cannot have “countable resources” that exceed the program limit which is frequently as low as $2,000 for an individual applicant.
Fortunately, your home is excluded, meaning it is not considered a “countable resource” for eligibility purposes. Likewise, when you apply for financial aid at most educational institutions the value of your home is not taken into consideration. Finally, many local, state, and federal assistance programs will offer an exemption for your home when calculating your eligibility for benefits.
Given the emotional and financial value of your home, be sure to consult with an experienced estate planning attorney to ensure that you, and your loved ones, make use of all the benefits your home has to offer, both now and in the future.