Build Wealth with a Tax-Free Gain on the ... - About Financial Matters
When a single taxpayer sells his or her principal residence that he or she has owned and used as a principal residence for at least two of the previous five years, the taxpayer may exclude up to $250,000 of the gain from gross income. A married couple who meets the conditions may exclude up to $500,000 of gain.
This means that the gain is never taxed. The taxpayer does not have to purchase a new home for the exclusion to apply. However, if the taxpayer has ever used the home or any part of it for business purposes, the taxpayer must pay taxes on the gain due to depreciation recapture.
While many people are aware of this exclusion provision contained in Section 121 of the Internal Revenue Code, few people have thought about how to use it as a strategic wealth-building tool. The way to use it as a wealth building tool is to buy a home below market value, such as a foreclosure or probate property, sell the home a little over two years later, and then repeat the process.
Another way to use this provision to its maximum is to act as one?s general contractor and build a home. Individuals who act as their own general contractors can often build a home for 80 percent or less of its value. There are books available that explain how to do so.
The advantage of buying a home below market value or building a home is that the taxpayer has a gain from the beginning. If the property appreciates more from the date of purchase or completion of construction, that is even better. The exclusion applies not only to the appreciation from the date of purchase or completion of construction, but it also applies to the gain from buying or building below value.
While moving is a chore, by moving every two to three years, a taxpayer can realize substantial gains that are free from federal income tax and Social Security tax. ?Keep moving? is not only a good slogan for physical fitness, it also can be good for fiscal fitness.
If a taxpayer has some extra cash left over after selling a home and buying another one, the taxpayer can place money into a Roth IRA up to the maximum amount allowed if the taxpayer is eligible to do so. Doing so allows the taxpayer to generate even more tax-free income.
For many taxpayers, tax deductions are becoming less valuable because of the alternative minimum tax (AMT). The gain on the sale of a principal residence that is excluded from gross income is not subject to the AMT. Taxpayers should use this generous tax provision to build wealth and minimize their tax obligations. The ability to exclude the gain on the sale of a principal residence is a great tax savings strategy.
Alan D. Campbell is a CPA in Arkansas and Florida and is self-employed primarily as an author of tax publications. He earned a Ph.D. in accounting with an emphasis in taxation from the University of North Texas. He is also admitted to practice before the United States Tax Court. He has published numerous articles on tax topics in professional journals. He is the co-author of the book Tax Strategies for the Self-Employed and the revision editor of CCH Financial and Estate Planning Guide, 15th edition. For more tax savings strategies, please see his blog: taxsavingsstrategies.blogspot.com taxsavingsstrategies.blogspot.com
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Source: http://www.story-of-finance.com/build-wealth-with-a-taxfree-gain-on-the-sale-of-your-home.html
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