Many people equate home ownership with financial success and the American Dream. It’s something most of us in the United States grow up thinking, and it’s something most of us believe we should do. But, owning a home isn’t for everyone, and depending on where you live it could be difficult to achieve. Owning a home isn’t necessarily a good investment either. (more…)
Whether you live in a popular residential market like Seattle, San Francisco or New York, or have simply lived in the same home for several decades, it’s more common than ever that households are incurring taxable gains when they sell their home.
Taxable gains from the sale of a primary residence occur when the gain from the sale is above the $250,000 gain exclusion for an individual and $500,000 for a couple. This gain exclusion is available to households that meet the following criteria:
The gain is calculated by subtracting selling expenses and your adjusted cost basis in the property from the sale price. The adjusted basis is what you previously paid for the home plus the cost of improvements. Since you are subject to federal capital gains taxes, state taxes (where applicable) and the 3.8% Medicare surtax (in many cases as the taxable gain can be sizeable), keeping track of your improvement history can lead to significant savings on your taxes.
What’s considered an improvement?
The IRS provides the following examples of common improvements to your home that will increase your basis. (more…)
An investment portfolio is typically described as a basket of stocks and bonds invested across the global markets. These securities usually have sufficient liquidity where they could be sold in a relatively short period of time to receive your money. 
While not all investments fit this description perfectly, most investors’ portfolios reflect these characteristics, whether that portfolio is invested through an assortment of mutual funds, exchange traded funds or individual securities. In return for capital, the investor hopes to earn capital gains, dividends and interest on a regular basis. By that definition, should real estate holdings be considered as part of your investment portfolio?
Your personal residence has different characteristics. First off, it provides shelter, so it can be considered a necessity. Homes can take anywhere from a few weeks, months or even years to sell, so it wouldn’t be considered a liquid asset that can be sold readily. Also, a home is located in a particular neighborhood, city, state, region and country, so it’s exposed to location-specific risks. You don’t receive dividends and interest annually from owning your home. In fact, you spend money on maintenance, mortgage payments, property taxes and insurance. You can, however, generate capital gains, but that occurs only if your home is sold for a gain. Often, sellers turn around and use the proceeds to purchase a new residence.
From the description above, an investor’s personal residence lacks marketability and diversification, and it requires additional inputs of capital to maintain. Equity real estate investment trusts (REITs), on the other hand, are investable assets and provide exposure to commercial, agricultural, industrial and residential real estate across the country and most parts of the world. Families who own their homes may also own a few rental homes, but most don’t have expertise and resources to own commercial, industrial and agricultural real estate. Exchange traded funds and mutual funds can track equity REIT indices (i.e., FTSE NAREIT) and provide a low-cost, inflation fighting, diversified option with daily liquidity and low investment minimums.
Similar to the reasons for including other asset classes in an investment portfolio, such as emerging markets equity or reinsurance, exposure to real estate through equity REITs adds incremental value to the portfolio. This is because equity REITs are fundamentally different from other asset classes due to differences in taxation, correlation and inflation-fighting characteristics. As a result, we believe equity REITs are better suited than a residence for a well-balanced, diversified portfolio.
