Summary: Build your own home and sell it for a profit several times over the years and you could have a mortgage free house.
Carl, If my wife and I built a new home with me acting as the general contractor, could we sell it later and reinvest the profit in another new home? Do we have to live in it first?
Hi Joe, yes you can sell it, but in order for you and your wife to benefit tax wise it has to have been your primary residence for at least 24 months prior to selling it.
All homeowners should know about the Internal Revenue Code 121 principal residence sale tax exemption up to $250,000 and up to $500,000 for a qualified married couple filing jointly.
To be eligible for this tax exemption benefit, home sellers must have owned and occupied their principal residence at least 24 of the 60 months before its sale.
An excellent article from NOLO is Avoiding Capital Gains Tax When Selling Your Home.
Millions of home sellers use this tax break each year.
As an owner builder saving 25% you could use this tax exemption to be mortgage free and have a mortgage free house by repeating this process every 24 months. Here's how:
• Build a sound, well-located house.
• Move in, making it your principal residence for at least 24 months.
• Sell the house at a tax-free profit. (not more than $250,000 or $500,000 for qualified spouses).
• Repeat every 24 months.
• Build the same house (so that you know the cost) on a comparable lot, in a comparable area, reducing the amount you need to borrow by the profit from each sale, and in 8 years, you could be Mortgage FREE.
If however, you live in it less than 2years, you may be subject to Capital Gains. But even capital gains (profit on the sale of a capital asset) receive a more favorable tax treatment than regular income.
Depending on your tax bracket and on how long you held an asset before selling it, you may pay about one-third to one-half less tax than you would have paid on the same amount if you had earned it as salary.
As with all taxable transactions, you should consult with a tax EXPERT before you make any decisions.
You should be aware that the IRS could consider these multiple transactions an actual business and tax you accordingly.
And remember, as NOLO says, Legal information is not legal advice!
Good luck, Carl Heldmann