We have previously talked about why it is more tax advantageous for your heirs if you keep your home during your lifetime and they inherit the property only after you pass away - in essence, they get to skip out on a lot of tax. However, forget the kids for a minute. What if you really wanted to downsize or just move somewhere nicer? Where's your tax benefit?

Below, we’ll be discussing a huge tax savings you can receive on the sale of your home. As you are probably aware, when selling assets, we sometimes have to pay capital gains taxes on the difference between what we purchased the asset for and what we sold it for. But, in California, you can exclude hundreds of thousands of dollars from that capital gain meaning you could sell your home, make a nice profit, and not pay a cent in capital gains. Additionally, here's the kicker, everything below applies federally as well, meaning that if you live in a state with the same or similar rules, such as California, then you could qualify for massive tax savings on the sale of your house automatically.

Firstly, there are differences between individuals and married or registered domestic partners, so we'll tackle each separately.

Single Tax Filers

For individuals, you can exclude $250,000 of profit from the sale of your home - meaning capital gains only kick in on any gain over $250,000 - if, you follow, what we call, the 5-2-2-2 rule. That is, during the last 5 years before the sale, you owned the property for at least 2 years, you occupied the home as a primary residence for at least 2 years, and you have not used this exclusion in the last 2 years... That's it.

Joint Tax Filers

Next, we'll look at couples, because it only gets better from here, and when referring to couples, we mean both married couples and Registered Domestic Partners. To start, since there are now 2 of you, that exclusion amount doubles to $500,000 - meaning capital gains only on gains over $500,000. Now, you might be thinking, "Surely to qualify for such a large exclusion, there have to be more hoops to jump through, right?" Well, not really. Firstly, the couple must have filed a joint return for the year of the sale, but aside from that, you're basically back with the 5-2-2-2 rule again. In the 5 years leading up to the sale, either spouse must have met that 2-year ownership requirement; both spouses must meet the 2-year primary residency occupancy requirement; and, neither spouse has used this exclusion in the last 2 years.

Keep in mind, everything discussed above is about capital gains taxes, which are often different than your ordinary income tax rates. These exclusions apply federally, but you'll need to check your individual state as to whether it allows this exclusion and what their capital gains tax rates are. For example, California's capital gains tax rate is in line with its normal income tax levels (1% to about 13%); New York's capital gains tax rate is 12.7%; Florida's is between 0 and 20%; and Texas has no state capital gains tax. Regardless, this is a massive tax benefit and another tool for building generational wealth by allowing for more hard-earned assets, and some of those gains, to stay in the family. Estate planning is centered around building and maintaining generational wealth and how you really create a better life for future generations.

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