Q. Is it possible to earn tax-free income?
A. Yes, despite the old saying - you can't avoid tax and death in this world, there are some ways to avoid tax, today we will discuss one of the best known ones:
Own and House
This is probably the best known method to get tax free gain - buy a house, live in there for a few years, then sell it for a profit, for no tax owed!
Specifically, an unmarried seller of a principal residence can exclude (pay no federal income tax on) up to $250,000 of gain, and a married joint-filing couple can exclude up to $500,000 of gain.
There are some limitations. You must pass the following tests to qualify.
If you don’t qualify for the maximum $250,000/$500,000 gain exclusion due to failure to pass all the preceding tests, you may still qualify for a prorated exclusion (reduced) amount if you had to sell your home for job-related or health reasons or for certain other IRS-approved reasons. For instance, say you’re a married joint filer. You and your spouse used a home as your principal residence for only one year before having to move for health reasons. You would qualify for a prorated exclusion of $250,000 (half the $500,000 maximum allowance for a joint-filing couple).
A. Yes, despite the old saying - you can't avoid tax and death in this world, there are some ways to avoid tax, today we will discuss one of the best known ones:
Own and House
This is probably the best known method to get tax free gain - buy a house, live in there for a few years, then sell it for a profit, for no tax owed!
Specifically, an unmarried seller of a principal residence can exclude (pay no federal income tax on) up to $250,000 of gain, and a married joint-filing couple can exclude up to $500,000 of gain.
There are some limitations. You must pass the following tests to qualify.
- Ownership Test: You must have owned the property for at least two years during the five-year period ending on the sale date.
- Use Test: You must have used the property as a principal residence for at least two years during the same five-year period (periods of ownership and use need not overlap).
- Joint-Filer $500,000 Exclusion Test: To be eligible for the maximum $500,000 joint-filer exclusion, at least one spouse must pass the ownership test, and both spouses must pass the use test.
- Previous Sale Test: If you excluded gain from an earlier principal residence sale, you generally must wait at least two years before taking advantage of the gain exclusion deal again. If you are a married joint filer, the larger $500,000 exclusion is only available if neither you nor your spouse claimed the exclusion privilege for an earlier sale within two years of the later sale.
If you don’t qualify for the maximum $250,000/$500,000 gain exclusion due to failure to pass all the preceding tests, you may still qualify for a prorated exclusion (reduced) amount if you had to sell your home for job-related or health reasons or for certain other IRS-approved reasons. For instance, say you’re a married joint filer. You and your spouse used a home as your principal residence for only one year before having to move for health reasons. You would qualify for a prorated exclusion of $250,000 (half the $500,000 maximum allowance for a joint-filing couple).
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