Question: We bought our first house in west Phoenix for $62,000 cash. The house is now worth $130,000. Our air-conditioning business is doing really well, and we want to move to a nicer neighborhood. My husband’s sister does our tax returns every year, and she says that we will not have to pay any tax on our profit of over $60,000. Is that true? My husband’s sister also says that we can buy a new house every two years and never pay tax on any profit if the real-estate market continues to improve. Is that also true? It doesn’t make any sense to us.
Answer: Your husband’s sister is basically correct in both of her comments. In the late 1990s, the federal tax law was amended to exempt any capital gain on the sale of a personal residence for up to $250,000 for individual taxpayers and $500,000 for married taxpayers. In addition, this federal tax law allowed a tax payer to sell a personal residence every two years and still be eligible for this exemption. Many commentators believe that this $250,000/$500,000 exemption, and the eligibility every two years for this exemption (in addition to the existing tax deductions for mortgage interest and real property taxes, started the rapid acceleration of house prices that resulted in the disastrous housing “bubble” of the mid-2000s. The goal of these various tax breaks is to promote homewonership in the United States, which is almost 70 percent today. Canada, however, has none of these tax breaks and almost the same percentage of homeownership.