Some ways to save at tax time

It’s that time of year. If you’ve filed your taxes, congratulations! Year-round tax planning is the best way to avoid last-minute surprises. 

The IRS website publishes very helpful information, particularly in the Tax Tips series at www.irs.gov/uac/IRS-Tax-Tips. I can’t give you tax advice, of course, but if you are selling a home, here are a few items you may want to discuss with your tax advisor:

• Capital Gain Exclusion. You may be able to exclude up to $250,000 ($500,000 for joint filers) of the gain from the sale of your main home;

• Ownership/Use Tests. In general, you need to have owned and lived in your main home for at least two out of the five years before the date of sale;

• Main Home. If you own more than one home, only your main home (the one you live in most of the time) is eligible for the exclusion;

• Reduced Exclusion. If you don’t qualify for the full exclusion, there are specific circumstances in which you may qualify for a reduced exclusion.

This reminded me of the 1031 Exchange provision in the tax code. I have clients who are using it right now to postpone paying tax on the gain from the sale of an investment property by reinvesting the proceeds in similar property as part of a qualifying like-kind exchange. It’s important to note that the tax is deferred, not excluded. Always consult a qualified tax professional if you are contemplating this kind of transaction. There are specific rules and requirements to follow or you won’t get the advantage of the deferment.

Finally, I have a favorite way to save money over the long term: refinance your 30-year mortgage to a 15-year mortgage and build your net worth by tens of thousands of dollars. You will own your home free and clear, pay less interest over time, and be able to use the money you aren’t spending on your home loan for other purposes.