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The
Center for Financial, Legal & Tax Planning, Inc. |
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Advisories
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Winning the Exclusion
Game Introduction Because
of booming housing prices in the 80’’s and 90’s Congress passed an addition
to the tax code to relieve the taxpayer’s burden. This section of the tax code has become
known as The Homesale Exclusion. In
it, single taxpayers can exclude $250,000 of gain from their homes, provided
they have lived there for two of the past five years. Married taxpayers can exclude up to
$500,000 of the gain on the sale of their homes. Without this section of the Tax Code,
taxpayers would pay 15% on the profits from the sale of their homes, as the
profits would qualify as capital gains.
This advisory will explain how to maximize the profit on your home
while Uncle Sam stands by and watches. One House This is the default situation. Every home-owning taxpayer expects to turn
a gain when selling their home. As
such, they are entitled to exclude 100% of the gain up to $250,000 or
$500,000 depending on their marital status.
For the average taxpayer, owning and selling one house is an excellent
opportunity to make a large amount of tax free money. You do not have to reinvest in a seasonal
home. For many taxpayers, selling
their homes is a one time transaction. Two Houses Why
stop with the sale of one house, when the law applies equally well to the sale
of two homes (tax free)? The rule
allowing the tax free exclusion is not a once in a lifetime exclusion like
the old home sale exclusion rule.
Since a taxpayer must use the dwelling as a primary residence for two
of the past five years, that leaves three years to make gains on a second
home which you use as personal residence.
Middle class taxpayers can engage in
this type of investment simply by selling one residence and buying
another. More affluent taxpayers can
maximize their tax free gains by buying two residences at the same time. Not only does the second home have the
benefit of appreciating over the same amount of time as the first home does,
the second residence purchased also qualifies for a second home interest
deduction under the Internal Revenue Code.
In addition to having the home interest deduction, the buyer can also
use the home as a vacation home.
Vacation homes not only mean going someplace nice, but also free or
lightly taxed income if you choose to rent the unit out when you are not
using it. In the meantime, if you use
it after you sell the first home; you can qualify for the $250,000 or
$500,000 exclusion again when you sell the home. Three Houses This
situation is comparable to holding a Royal Flush in Poker. It is the absolute best hand to hold! In this situation, the taxpayer must hold
two houses simultaneously and preferable a third, so it is not possible for
all taxpayers to qualify. Under this
situation, the taxpayer will own three houses simultaneously. The first home will be the most expensive
home, as you will deduct interest from the home on your tax return. The second home will be the second most
costly. It too can have its interest
deducted on your tax return as a second home.
The third home will be the least costly as its interest and expenses
are not deductible as itemized deductions.
However, the homeowner should rent this location to a willing renter
while the homeowner is living in the first home. Doing this will generally
cover the interest and maintenance expenses on the third home. Once the first home is sold, the second
home becomes the primary residence and the third house becomes the vacation
home. The entire time, the third home
is appreciating in value. You then
switch to the “two home” situation, deduct all interest and taxes on both
houses and qualify for the “homeowner’s exclusion” again. Conclusion The
Home Sale Exclusion is a windfall for those who seek and seize the
opportunities it provides. Owning more
than one home is a great opportunity to make money and enjoy a vacation
home. What is really great is the tax
law as it applies to this strategy.
If you have the means, home investment is a great opportunity to make
tax free money. To receive the Advisory by e-mail,
please send your address to lacie@taxplanning.com |
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The Center
for Financial, Legal and Tax Planning, Inc. |
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Satellite Office: Longboat Key, FL |
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(618) 997-3436 Fax: (618) 997-8370 © Copyright 2005. All rights reserved. |
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