There is no free lunch, but there is one way that you can make some money tax free that is still legitimate.  Your personal residence is a great investment and could help you increase your net worth.  Let’s review the rules:

1.  You must use your house as your primary residence for at least 2 out of the past 5 years.  If you do not meet this requirement, and you transfer because of your employment or medically-related reasons, you may still be able to prorate the allowable deduction.

2.  If you are married and you both have met the criteria for #1, you can profit up to $500,000 with no tax consequences.  If you are single or only one of the married parties meets the criteria in #1, you can profit up to $250,000 with no tax consequences.

So let’s discuss an example to make sure you understand.  Rick and Janine buy a house in January 2005 for $250,000.  In February 2008, they decide the market value is up and they would like to downsize.  They sell their house for $450,000.  They made a whopping $200,000 profit and the best part is that they do not have any tax burden.  They also do not have to reinvest in another house (like many remember from the old law). 

If Rick and Janine just got married and Rick sells his house, the maximum tax free amount is only $250,000 rather than $500,000 since Janine never lived in the house.

One last example:  Rick and Janine live in their house for one year and then Janine gets a job transfer to Atlanta.  Their prorated exemption is only 1/2 of the full amount since they only lived their 1/2 of the time required for the full tax free profit allowance.

If you sell your house, don’t forget to get advice about the reporting requirements from your tax advisor. 

Donna Bordeaux is a Certified Public Accountant and Personal Financial Specialist with Bordeaux & Bordeaux, CPAs, PA in Lake Wylie, SC (a suburb of Charlotte, NC).  For further information about Donna or her firm, please visit www.yourcpapartners.com.

This entry was posted on Sunday, February 24th, 2008 at 5:49 pm and is filed under Individual Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.