Is This Your Situation: Want to Turn Sweat Equity Into Tax-Free Profit?
Do you enjoy remodeling and have a knack for upgrading homes? The current tax law provides an opportunity to invest in fixer-upper homes and realize a tax-free profit.
The reason has to do with a tax law that lets you escape paying taxes when you sell your main, primary residence. If you qualify, you can walk away with as much as $500,000 tax-free (married filing jointly) or $250,000 if you’re a single filer.
To reap the current tax benefit, you must live in the home two out of the past five years, giving you plenty of time to do the renovations.
Here's where the money-making opportunity comes in. There's no limit to the number of times you can renovate and resell a house for the tax-free profit, as long as you own and live in the house for the required two years.
How lucrative can this be? Let's say you find a structurally sound home that needs cosmetic work and buy it for $250,000--a substantial discount from surrounding, better-maintained properties.
You move in and spruce the place up in your spare time, spending $20,000 on paint, wallpaper and new carpeting.
Two years later, you sell the house for $340,000 and pay $20,000 in closing costs. Your profit is a cool $50,000. This is calculated by taking the $340,000 sales price and subtracting the $250,000 original cost, $20,000 fix-up expenses and $20,000 closing costs.
If building sweat equity appeals to you, it's perfectly legal to move on to another house and repeat the process. The best part: You don't owe a cent in federal taxes because your profits are below the $250,000 threshold for single filers.
Now compare this profit to earning a salary. In the 28 percent tax bracket, if you make $50,000 annually, you owe $14,000 in federal taxes--and that doesn't include Social Security, Medicare and any state taxes.
As you can see, selling homes for a profit can be a great way to earn tax-free dollars. In most cases, the key is finding the right house in the right neighborhood and spending the time to improve it. You get the fulfillment of turning an eyesore into an asset, and tax-wise, it sure beats regular work.
Interested in buying a fixer upper? Call or email me and we'll discuss your options.
Tax laws and tax rules are constantly being updated and interpreted. This article contains general information, so please discuss your individual situation with a trusted tax adviser before making tax decisions.