home. Quite simply, most of us will be able to exclude from our income any capital gains that we realize when we sell our home. The capital gain is the difference between your sales price and your cost basis—or the amount that you paid for the house plus any improvements that you made while you owned it."
"There are a few conditions, of course," Roy added. "For one, there are some limits on the amount of gain you can exclude, but they are pretty generous. If you are single, you can exclude up to two hundred and fifty thousand dollars of gain. If you're married, the exclusion is five hundred thousand. Most people, married people at least, will never realize a gain that large on their home, even over a period of decades. Maybe if you discover a gold mine on your property . . .
"Also, this relates to your principal residence and not rental properties like yours, Tom. You have to have occu-pied the home for at least two of the five years preceding the sale, and you can only use the exclusion once every two years.
"So, Dave, say you were to purchase a one hundred and twenty-five thousand dollar home and make twenty-five thousand in improvements to the property during the time you own it. Assuming you meet the occupancy requirements, to what value would the home need to ap-preciate before you would be forced to pay a tax on the gain?" Roy asked.
"Why do you keep directing the math questions at me?" I countered, pausing. "We would have to sell it for more than five hundred thousand over our cost basis, which is one hundred and fifty thousand—so, over six hundred and fifty thousand."
Home Sweet Home
to maintain. While it's still a good idea to keep records of major improvements, it probably isn't necessary to maintain meticulous files of every little expense related to improving your principal residence."
"The tax incentives associated with home ownership do indeed make it an appealing investment. Those benefits, combined with real estate's finest quality—leveragi-bility— make owning your own home unbeatable," James Murray stated in a very matter-of-fact tone.
"Leveragibility?" Cathy and I said simultaneously. "That's an investment term coined by one of the finest financial minds of our time—me. Leveragibility applies to an investment that not only has the ability to be leveraged, that is, to be borrowed against, but also has the ability to produce an income to offset the costs of being leveraged. You see, not only can you borrow against the value of your real-estate property, that is, mortgage it, you can also usually cover the costs of that borrowing with the rental income. It's that leveragibility that makes real estate the greatest investment of all time," replied a very convincing James Murray.
"I really think you should be on late-night TV peddling seminar kits, James." Roy laughed. "I do agree that 'leveragibility,' as you call it, is the reason that real estate is such an attractive investment. As I showed with our earlier examples, the fact that rental income can offset borrowing costs means that a relatively small investment, the down payment, can grow dramatically even if real-estate values grow by only six percent a year. Imagine if they were to grow by more than that."
"You just can't beat owning your house," James Murray argued. "In addition to the benefits we've already discussed,