The 1997 Taxpayer Relief Act was a great boost for average people who wanted to sell their home and buy a new one. It was also a great boost for investors. Couples are allowed to exclude up to $500,000 of the capital gain on the sale of their primary residence. Single individuals can exclude up to $250,000. In other words, the sale of the house is never reported on your federal IRS forms if the capital gain is less than the $500,000 and $250,000 limits. This exclusion is based on compliance with two requirements:
1. The home must have been the primary residence for both spouses during two of the last five years. The two years do not have to be consecutive but if you rent out the primary residence for more than three years you would be required to occupy it again for two years.
2. The exclusion is available only once every two years.
Capital gains above $250,000 for singles and $500,000 for couples are taxed at the applicable rate. What if you sell your house before meeting the two year requirement? If you qualify under one of the unforeseen events listed in the IRS publication, such as a job change, illness or an unusual hardship, you can still qualify for a prorated exclusion. Check Publication 523 for a complete list of unforeseen circumstances, at:
http://www.irs.gov/pub/irs-pdf/p523.pdf
There are many advantages to buying, repairing houses and selling after two years, while utilizing the tax exemption. My wife and I maintain rental properties that provides regular monthly income, but we are also buying and selling with the tax exemption, to generate cash for future investments, and just to have more cash on hand. I will cover more details of the tax exemption in up-coming posts, such as how it works, advantages to investors of using the exemption, what properties to buy, and other topics.
Info on Terry's Book
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4 comments:
I'm *so* glad to see you mention this type of investing-- somehow it gets overlooked by most which is a shame as its one of the best ways to raise capital for those next houses.
Play it again, Sam~! (...er, Terry :) )
Terry - This is great.
If we didn't absolutely love where we lived we would consider this tax exemption. BUT we already live in a dream area location. The home isn't a dream but the little farm we acquired 10 years ago has appreciated nicely so we can at least use the equity to invest in future properties.
I am looking forward to reading more!
Blessings,
Maria
This is a great point. If you have the flexibility to move to take maximum advantage of this exemption, an investor could clean up. I look forward to reading more about how you take advantage of this tax benefit.
Mike,
You're right, if you have a family they must be on the same page, and be willing to pick up and move frequently, to make it work.
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