Capital Gains on Homes: A Guide for Those who are not MPs

As part of the 'expenses scandal', it has come to light that some MPs have been deciding which of their homes is treated as their principal residence, in order to save capital gains tax (CGT).

The rules on gains made on property are fairly clear. As far as your main home is concerned, there is no CGT to pay, provided: it was primarily for use as your home rather than with a view to making a profit; that it was your only home throughout the period you owned it (ignoring the last three years of ownership): and you did actually use it as your home. There are other rules which your financial or mortgage adviser can outline for you.

Importantly, if you are married or in a civil partnership and not separated you and your spouse or civil partner can have only one such residence between you (which may surprise some MPs). As far as second residences are concerned, you will normally be expected to pay CGT on any gain you make, after certain allowances.

Can you flip too?
The question is, of course, if MPs can decide which residence is their 'principal' one, can you do so too? The surprising answer is - at least until the government moves to close this gap - that you can. If you own and occupy more than one residence, you can choose which one is to be your primary residence for CGT purposes (subject to some restrictions).

This is particularly helpful for those who buy a holiday home with the intention of retiring to it later on. If they move to the retirement home a year or so before selling their main family home, they can still opt to have the old home treated as their principal residence, so that it is exempt from CGT. More importantly, if they decide, while still living in the main family home, that the 'holiday/retirement' home is in the wrong place, they can usually designate the 'holiday/retirement' home as their principal residence, sell it, buy another one elsewhere and then re-designate their family home as their principal residence. In this way, just as for MPs, there will be no CGT payable.

Let property
Where a second property has been let, in order to generate an income, it may be possible to obtain letting relief, which can reduce the chargeable gain by as much as £40,000 per owner. For most landlords, £40,000 represents a considerable gain that can easily be put towards additional needs such as landlords insurance.

How much will CGT be?
As indicated above, a couple can only have one principal residence at a time, but each has a personal allowance against CGT. For the current tax year, this is £10,100 per individual. So imagine that a married couple were to sell a property that did not qualify for relief as their principal residence, for £500,000 that they had bought some time earlier for £350,000. This would make a gain of £150,000. Each would be entitled to an exemption of £10,100 so, assuming equal ownership, the taxable gain would be £129,800. With the rate of CGT at 18%, this would create a tax charge, between them of £23,364 (provided no other chargeable gains had been made during the year).

If the property had been purchased with a view to passing it down the generations, making the children joint owners from outset would mean that they, too, could use their annual exemption to reduce the liability.

You should take individual professional advice before making any decision relating to your personal finances and should be aware that there may be variations for those living in Scotland and Northern Ireland. Also remember that your home may be repossessed if you do not keep up repayments on your mortgage, so you should think carefully before securing other debts against your home. Fees for mortgage advice may be charged and for details of these please contact your usual adviser.

RENTING CAN COST YOU THOUSANDS... EACH & EVERY YEAR !

The consequences of renting can be equivalent to financial sabotage. Let's take a quick look.

For our example, let's rent a typical 3 bedroom apartment for $800.00 per month. Now we will compare that to owning your own home, with a mortgage of around $800.00 per month.

If we are in the initial years of owning our home, the interest and taxes will be deductible. This means that with average taxes and interest, we will be able to deduct about $9,000.00 from our income taxes.($6,000.00 in interest and $3,000.00 in property taxes)

We will assume that we fall into the 25% tax bracket, so that will calculate to $2,250.00 in interest and $3,000.00 in taxes. We add these amounts together for a total of $5,250.00. This is the amount we can deduct because we own our own home.

In our example, let's take that $5,250.00 and divide by twelve months to arrive at $437.50. If we add this to our $800.00 rent payment, that comes to $1,237.50.

Why are we adding this to our rent payment? Because we are spending the $800.00 per month either renting or owning, and the tax deductions are given to owners and not renters.

Hmmmm...in essence we are paying $1,237.50 for a three bedroom apartment that we will never own. Our first thought is,"I have to rent because I can not qualify for a mortgage." We will hold that thought for just a minute.

Quite some time ago, I was coming out of a rough divorce, and needed a home for my new family. My credit had really taken a nosedive, and I could not qualify for a mortgage. I thought that I would be stuck renting.

Then I discovered this technique, that would allow me to buy a home without obtaining a mortgage. What a blessing, and the home was beautiful!

If some of this is sounding familiar, or if you are just sick and tired of renting with nothing to show for it, then you absolutely need to become aware of this technique that I used.

You can use the method that I am talking about, and become a homeowner in 30 days or even less.

I will show you how I did it, and take you step by step, to transform you from renter to owner.

Remember, that this will work even if you have bad credit. Ask me how I know this.

Let's Do It Together!