How My Friend Made $142,500 Tax Free!

Do I have your attention? With a bold headline like this, I hope I do! Working as a real estate
broker these past 15 Years, I get several calls a week from clients, friends and strangers. 90%
of the time they for advice and over time I’ve become numb to 90% of the questions and
answers. Growing up in a real estate family, I can’t remember not knowing what some real
estate terms meant. Appraisal, capital gain taxes, home inspection, FTB, CMA, HVAC and
depreciation are just some terms that when I really think about it, I can’t remember not knowing
what they mean. Thus sometimes I find that some people perceive me speaking in tongues.

Sometimes however, I get a question that rouses me out of my slumber. An animated question
that may challenge me, or that will make my client, friend or stranger some cold-hard cash!
Let’s rewind the clock to January of this year; it was a Sunday-Funday. My phone rings and it’s
a good pal of mine. A real analytical type who is really smart. He and his wife own a condo
they currently rent out and he was considering doing a “cash-out refi” (there I go again) and
continue to hold the condo as a rental. They lived in it for 7 years and moved out over 2 years
ago because they outgrew it. Now, wanting to pull some money out for investment purposes he
started some research. He said, “Voltaire, I want to keep the property as a rental but I learned I
may lose my capital gains exclusion. What should I do?” Now just for the record, I’m a real
estate broker, I’m NOT a tax guy, NOR a CPA, NOT a tax attorney and this is definitely

    NOT TAX ADVICE!

As a broker, I usually get paid when people sell or buy real estate and generally not when I give
real estate advice. Sometimes my advice leaves my bottom line emaciated but it’s okay
because I pride myself in being a true advisor. Therefore most of the time, when people call me
wanting to sell their property, I advice they should keep it until they die because they can have
good income later in life and it’ll come in helpful during the golden years!

So when I heard him say the term “Capital Gains Exclusion”, it wasn’t a mundane Sunday any
longer because I knew that he could potentially take advantage of the US Tax System and earn
tax-free money…lots of it!

So I started to dig.

Me: When did you buy the condo? Him: 2008
Me: When did you move out of the condo? Him: 2015
Me: How much did you buy it for? Him: $210,000
Me: I think Value is $375,000. Him: Nice!
Me: Your profit potentially could be $142,500. Him: Nicer!
Me: I’ve seen past clients sell and not pay any taxes on profits; you should call your accountant!
Him: I will!

In general in the U.S., whenever you earn income, you have to pay taxes on that income. There
are loopholes or exceptions to this rule of thumb and the “Capital Gains Exclusion” is one and a
powerful one at that! Generally speaking this rule goes something like this:
If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your
home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for
a married couple filing jointly. It’s basically a gift from the IRS!

After speaking with him, I realized that sometimes I forget how omnipresent this scenario
is among property owners so I decided to write about it in hopes that it helps someone who is
currently in a analogous situation. So this is how my friend made $142,500 Tax-Free! I hope it
puts a smile on your face like it did on mine!