Many people live in a house for enough years to see it appreciate in value—sometimes to appreciate a great deal, although the amount of appreciation varies with location and economic conditions. When you sell that house, the money from the sale goes, first, to pay any existing balance on your mortgage, Realtor fees, transfer taxes, and the like.
But if the house’s appreciation is great enough you come away with a capital gain, which is subject to federal income tax. After deducting any expenses you incurred to make the sale (including renovations), the first $250,000 per individual or $500,000 for a couple, is tax free.
For a retiring couple whose house appreciated a great deal in the thirty years that they lived there, that can be a huge portion of the capital gain from the sale and a huge boost to their savings account.
For example, Ron and Laura took advantage of this exemption when they both retired and sold the home they had lived in for twentythree years. They paid $62,000 for the home, and during those years it had appreciated to $387,000.
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