Question:
“I have no mortgage on my home and I know when I sell I’m going to pay a lot in taxes. Can I just put a big loan against it so I pay less tax when I sell?”
Answer:
Sorry, but you’re taxed on your taxable gain, not on your net.
Here’s the basic formula for determining your taxable gain on your principal residence:
Sales price
– Selling costs
– Purchase costs
– Purchase price
———————–
= Gain
– Exclusion*, if applicable
———————–
= Taxable gain
As you can see, mortgage is nowhere in that equation. While it does impact your net, it does NOT impact your gain.
*If you’re selling your principal residence that you’ve owned and lived in for at least 2 of the past 5 years, you usually can exclude up to $250,000 (singles) or $500,000 (couples) of gain from taxation.
See your tax professional or call me for details.
