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Second home tax strategy
1054 Views ::
2 Comments ::  :: Second Homes |
Is buying a second home a wise tax strategy?
Homeowners aim to save big on sale of first home
DEAR BOB: My wife and I bought a house in 1995 for $180,000. Since then, we have taken out home-improvement loans and now owe $320,000. Similar nearby houses sell for $600,000. In 2004, we bought our current home for $640,000 and rented out our former home. We have been told if we sell our first home within three years after buying our second home we won't owe any capital gains tax. Or should we try to sell it now although the local home sale market is a bit slow? --Manuel A.
DEAR MANUEL: You received incorrect tax information. Buying a replacement home is irrelevant. Also, the mortgage balance on your old home doesn't matter.
To qualify for the Internal Revenue Code 121 principal-residence-sale tax exemption up to $250,000 for a single person (up to $500,000 for a qualified married couple filing a joint tax return), you must have owned and occupied the home at least 24 of the last 60 months before its sale.
That means you have up to 36 months after moving out of your principal residence to claim your tax-free sale profits. If you rent it longer than 36 months, you lose your exemption.
However, since you rented the house after vacating, the depreciation you deducted on your tax returns will be taxed at the special 25 percent federal tax rate for recaptured depreciation. For full details, please consult your tax adviser. By Robert J. Bruss Inman News |
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By
Account @
Friday, October 27, 2006 10:43 AM |
TAX LAW ENCOURAGES PROFITABLE TAX-FREE HOME SALES. Just in case you have no clue what this is all about, every homeowner needs to know that Internal Revenue Code 121 permits tax-free principal residence sales profits up to $250,000 (up to $500,000 for a married couple filing a joint tax return).
To qualify, the home seller(s) must own and occupy their principal residence at least 24 of the last 60 months before its sale. But IRC 121 can only be used every 24 months. If you want to maximize your tax-free sale profits, there are five easy steps:
1. Buy a sound, well-located house or condominium below market value needing cosmetic fix-up work.
2. Move in and make it your principal residence.
3. Make profitable improvements to the residence that cost less than the market value they add.
4. Profitably sell the house at a tax-free profit not exceeding $250,000 (up to $500,000 if husband and wife occupied the home 24 or more of the 60 months before sale and they file a joint tax return).
5. Repeat every 24 months to become known as a tax-free "serial home seller."
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By
Account @
Friday, October 27, 2006 10:44 AM |
WORK WITH A SAVVY BUYER'S AGENT TO FIND FIXER-UPPERS. Buyers of fixer-upper houses have a major advantage. Most other home buyers don't want these fix-up houses. They prefer to buy a house, turn the key in the door, and move in. That's the way to profitably sell your house.
A sharp buyer's agent will alert you when a fixer-upper house with "the right things wrong" comes on the market, whether it be in the local MLS (multiple listing service) or a "for sale by owner" FSBO. In the current "buyer's market" in most cities, there is little demand for these run-down houses offering profit potential.
Additional sources of profitable home purchases, which most buyer's agents don't follow, include foreclosures, probate and bankruptcy sales. Vacation or second homes can also be profitable, but they have special risks such as fickle buyer demand, which is often seasonal and volatile.
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