Despite the recent slump in the real estate market, 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, passed in 1997, that increased the amount you can exclude from taxes after selling a home. If you qualify, you can walk away with as much as $500,000 tax-free
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Tips
Hang on to receipts. Records relating to home improvements will come in handy if your profit exceeds the $250,000 amount for single taxpayers or $500,000 for married couples filing jointly. Qualified expenses can affect the adjusted basis, which is used to figure gain on the sale of a home.
Choose improvements carefully. Some fix-up projects do little to boost the resale prices and eat into profits.
Consider all costs. When evaluating a property, don’t forget to factor in costs such as mortgage points, credit report fees, escrow charges and appraisal fees.
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if you’re married and filing a joint tax return and $250,000 if you’re single. The tax law restrictions are much friendlier than they used to be. For example, homeowners can find a less expensive home at any age and get as much as $250,000 or $500,000 of tax-free profit. Before the 1997 law, a replacement home had to be of equal or greater value or you had to be older than 55 — and then, you could only avoid as much as $125,000 of capital gain.
To reap the current tax benefit, you must live in your principal residence for two out of the past five years. Here’s where the moneymaking 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 $330,000 and pay $10,000 in closing costs. Your profit is a cool $50,000. This is calculated by taking the $330,000 sales price and subtracting the $250,000 original cost, $20,000 fix-up expenses and $10,000 closing costs. And, when the housing market recovers, you might realize a bigger profit.
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.
Now compare this profit to earning a salary. In the 28 percent tax bracket, if you make $100,000 annually, you owe $28,000 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 for some people, it sure beats regular work.
About Deborah Laemmerhirt
Let me assist you in finding everything you need to know about buying or selling a home! As the preeminent real estate professional in my community, I am dedicated to providing the finest service available while breaking new ground.
Because the real estate industry is becoming more sophisticated and challenging every day, you need a professional that understands the industry and is positioned to stay ahead of the game.
I go the extra mile to help you achieve your goals. That’s why I constantly research the home, market and estate values so your home is priced effectively from day one. I also make sure the public knows your home is for sale by using innovative marketing techniques to attract potential buyers.
As an Internet-savvy real estate representative in Connecticut, I’ve had the opportunity to help many home buyers find their ideal homes and many sellers obtain top dollar for their homes. Buying or selling a home is one of the largest financial transactions that most people ever undertake, so I will help you through every step of the process. My goal is to make your home selling or buying experience as easy and enjoyable as possible.
My services include:
Explaining the home selling and buying process thoroughly
Diligently selecting homes that meets your criteria
Pricing your home correctly and implementing a unique yet proven marketing plan
Negotiating on your behalf
Tracking the closing process to ensure a smooth transaction
I welcome the opportunity to address any questions you might have about buying, selling or current market conditions. Please call or e-mail me any time, and I will be happy to discuss your next steps in the buying or selling process.
I specialize in both Residential and Commercial Properties.
I also head a Real Estate Group to provide you with expert service and support.
Areas of Expertise
Making transitions in your life is challenging. You may be moving from out of town, a different state, internationally or just next door! Regardless of the distance I am prepared to respond to your unique needs.If you are a BUYER looking to downsize, up-size, want a new construction, desire a condominium, to invest, even if this is your first home, I will design a unique plan to fulfill your needs in a reasonable time frame, with the best negotiated price and the least amount of inconvenience.For my Home Sellers, I have an innovative marketing plan that will leave nothing to chance. Just call, and I would be happy to share the DIFFERENT and SUCCESSFUL TOOLS I utilize on each of my listings.
I have lived in Connecticut for over 35 years. I practice Real Estate in Fairfield County, New Haven County and Litchfield County. This includes, but is not limited to Bethel, Bridgewater, Brookfield, Danbury, Harwinton, Kent, Litchfield, New Fairfield, New Milford, Newtown, Oxford, Ridgefield, Redding, Roxbury, Sherman, Southbury, Warren, Washington, Westport and Wilton.
