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Editor's note: This week we've been sharing some of our best tax-related ideas (you can read these essays here, here, here, and here). Today, we conclude our series with the grand-daddy of all tax "loopholes." This idea comes from True Wealth Systems analyst Brett Eversole. Read on to learn about...
The Most Valuable Tax "Loophole" Available TodayBy
Friday, February 13, 2015
The government seems to spend its time finding ways to increase taxes...
In 2013, income taxes for America's top earners increased. And in last month's State of the Union address, President Obama proposed capital gains tax increases among other changes.
The only things certain in life are death and taxes, as the saying goes. But if you haven't already, you can still take advantage of one of the most powerful tax loopholes available... your home.
For most individuals, buying a home is a powerful tax shelter. In fact, I can't think of an asset that has more government incentives than the home you live in.
Let me show you what I mean...
First, you can deduct the interest on your mortgage off your taxes. You can also deduct certain other expenses, like insurance and property taxes. Depending on your income tax bracket, this could lead to tax savings of a few hundred dollars a month.
But that's the small stuff. The major tax advantage comes when you sell your home...
This is probably the best tax loophole available today... The government allows you to keep up to $500,000 in capital gains, tax-free. (Depending on your filing status.)
That's not a typo. If you're married, you can keep up to half a million dollars in profit on your home sale without having to pay any capital gains taxes. And that benefit could have a massive positive effect on your net worth.
For example, say John buys a $250,000 home and Jill buys $250,000 in stocks and bonds. After 20 years, both have increased in value to $750,000 – a $500,000 increase.
When John sells his home, he pays no taxes. He walks away with the full $750,000. Jill, on the other hand, has to pay capital gains taxes on the $500,000 she gained. Today, that would leave her owing 20% to the government – or $100,000.
Jill would walk away with just $650,000... 13% less than John.
This is truly the most valuable tax loophole available today. And all you need to do to take advantage of it is own a home.
Importantly, buying a home is still a good investment decision today. Housing is still incredibly affordable... and that means higher prices are likely from here.
We've written about housing affordability many times in DailyWealth. (See here, here, and here). It's a simple idea...
Housing affordability compares three things... income, home prices, and mortgage rates. These three factors tell us if typical incomes can pay for typical mortgage payments.
Today, affordability sits well above its historical average. Home prices would need to rise around 30% for affordability to move back to normal.
This tells us that there is still upside in U.S. housing. And that the most valuable tax loophole available is still a prime opportunity.
If you don't already own a home, it's a tax loophole you should consider today.
Good investing,
Brett Eversole
Further Reading:
According to Steve, mortgage rates should remain low for longer than most people think. "Who are you going to believe?" he writes. "The 'King of Bonds' or your mortgage broker?" Get the full story right here.
Most folks don't realize you can actually make big money paying other people's property taxes. For the full details, check out Steve's classic essay: I'm Earning 18% Interest from the Government. You Can Too...
Market NotesSELLING THE BASICS: BEER EDITION Our "basics" advice is turning out to be ridiculously profitable...
Regular readers know that when it comes to investing in high-growth emerging markets, like Brazil, India, and China, we avoid hot gadgets and Internet stocks. Instead, we recommend the dominant global companies that sell the "basics" – things like soda, beer, and cigarettes – to these markets. These "boring" products are always in demand. After all, there's scant risk new technology will make having a beer after work obsolete.
We often point to global brewing giant Anheuser-Busch InBev (BUD) as a way to take advantage of this idea. Our colleague Dan Ferris classifies the company as a "World Dominator." BUD owns many of the dominant beer brands in the U.S... And it has a big "footprint" in many of the world's fastest-growing economies.
Today's chart shows shares of Anheuser-Busch are in a huge long-term uptrend. The stock doubled in value over the past three years... and just last week, shares hit a new all-time high. It's the latest proof of what we've been saying for years: Selling the basics isn't exciting... It just works!
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