Home Loopholes so Your Home Pays You (Part 1)
Have your home work for you! It takes a change in outlook and a different line of attack-but taking advantage of home loopholes will definitely benefit your wealth building plan. The following is adapted from “Loopholes of the Rich” by Diane Kennedy, CPA.
The second biggest expense for the average American is their home. Many people slave away at a job they don’t really like and work harder than they want in order to afford their home. How would you like to have your home work for you? If you do it right, your home can provide a tremendous source of home loopholes that add to your tax-advantaged wealth-building plan.
Yes, you will have to do things differently to take advantage of these loopholes. But, isn’t that the point? Most people work for their houses. Follow a different strategy and you can live in a beautiful home and have your home work for you! That’s what home loopholes can do for you.
HomeLoophole #1-Live in Your Home for Two Years
Congress has given us a terrific tax gift! For the past seven years, you have been able to take tax-free gain on the sale of your home of up to $250,000 for a single filer and $500,000 for married, filing jointly. In order to take advantage of this tax-free exclusion, the rule is that the property must have been used as the principal residence for two of the previous five years. The five-year period runs backward from the date of the sale of the property.
The calculation for the two-year period is actually a total of days—730 days. But it’s not that straightforward. Short temporary absences for vacations or seasonal absences are counted as periods of use, even if the individual rents the property out during those periods of absence. Note that any absence over one year is not considered a temporary absence. That means that you could live in your home for one month, move out for 11 months (during which time you rent the property), move back for one month and then rent it out for another 11 months and qualify as having it as your principal residence for two years.
For a married couple, the ownership test is met if either spouse meets the ownership test. However, if one of the spouses has taken advantage of this loophole on another property within the previous two years, the couple must wait two years from the date of the sale to take advantage of this exemption on the current property. Otherwise, the gain exclusion is limited to $250,000 (the amount of exclusion for a single taxpayer). So, if you get married and your new spouse has not taken advantage of this exclusion within the past two years and you have lived there for two years, you have the full $500,000 gain exclusion.
I have clients in my CPA firm who don’t even work anymore. All they do is buy a property, fix it up, and wait two years until they can sell it and take the gain tax-free. Of course, that type of plan needs good financing, credit lines, or a cash reserve to pull off!
Have your home work for you! It takes a change in outlook and a different line of attack-but taking advantage of home loopholes will definitely benefit your wealth building plan. The following is adapted from “Loopholes of the Rich” by Diane Kennedy, CPA.
The second biggest expense for the average American is their home. Many people slave away at a job they don’t really like and work harder than they want in order to afford their home. How would you like to have your home work for you? If you do it right, your home can provide a tremendous source of home loopholes that add to your tax-advantaged wealth-building plan.
Yes, you will have to do things differently to take advantage of these loopholes. But, isn’t that the point? Most people work for their houses. Follow a different strategy and you can live in a beautiful home and have your home work for you! That’s what home loopholes can do for you.
HomeLoophole #1-Live in Your Home for Two Years
Congress has given us a terrific tax gift! For the past seven years, you have been able to take tax-free gain on the sale of your home of up to $250,000 for a single filer and $500,000 for married, filing jointly. In order to take advantage of this tax-free exclusion, the rule is that the property must have been used as the principal residence for two of the previous five years. The five-year period runs backward from the date of the sale of the property.
The calculation for the two-year period is actually a total of days—730 days. But it’s not that straightforward. Short temporary absences for vacations or seasonal absences are counted as periods of use, even if the individual rents the property out during those periods of absence. Note that any absence over one year is not considered a temporary absence. That means that you could live in your home for one month, move out for 11 months (during which time you rent the property), move back for one month and then rent it out for another 11 months and qualify as having it as your principal residence for two years.
For a married couple, the ownership test is met if either spouse meets the ownership test. However, if one of the spouses has taken advantage of this loophole on another property within the previous two years, the couple must wait two years from the date of the sale to take advantage of this exemption on the current property. Otherwise, the gain exclusion is limited to $250,000 (the amount of exclusion for a single taxpayer). So, if you get married and your new spouse has not taken advantage of this exclusion within the past two years and you have lived there for two years, you have the full $500,000 gain exclusion.
I have clients in my CPA firm who don’t even work anymore. All they do is buy a property, fix it up, and wait two years until they can sell it and take the gain tax-free. Of course, that type of plan needs good financing, credit lines, or a cash reserve to pull off!