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I am considering taking time off from work in order to build a new home in which we would live. It would be my full time job for which no income stream would be generated and would be self financed. Even though I would be working, I would not be getting paid. Even though I would be creating value, no cash would be coming to me as income, resulting in no taxes owed, as I understand the tax codes.

QUESTION: If we lived in the house for more than two years, which I understand is the limit necessary to avoid paying capital gains taxes, and then sell the house, on which there is no lien as it was self financed, would there be any way to be imposed a fiscal liability of any kind?

I am asking this because, were I to have a conventional job but hire contractors to build my house, I would be paying income tax on my salary, which may be refunded at the end of the year as a result of home building expenditures. But nonetheless, my labor and the labor of the contractors would be taxed. However, if I were to work exclusively on my own project, which generates no immediate income but was monetized at the end via sale nonetheless (taking advantage of the law that waives tax liability after a certain time of occupancy), it turns out that in the end I could be making money as a result of work performed that is not being taxed, which some may see as a tax loophole.

  • Where are you? That always matters for tax questions. ... In the US I think this effectively comes under the exclusion for sale of primary residence, but I'm not 100% certain. – keshlam Aug 3 '15 at 21:06
  • United States... – amphibient Aug 3 '15 at 21:07
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    By example, you're going to buy unimproved land for call it 100K, you'll spend call it 100K on sticks and bricks, and certain contracted services (a guy with a backhoe to excavate the foundation, a solar energy installer for a true off the grid lifestyle), then live in the place for 2+ years and sell for whatever you can get? – user662852 Aug 3 '15 at 21:11
  • that is approximately right, @user662852 – amphibient Aug 3 '15 at 21:12
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This is called imputed income, which is generally not taxed in the US.

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    I think Imputed Income is also the term used in some situations specifically for the purpose of paying additional taxes. For example, my employer offers health insurance for domestic partners (non-married). This results in the employee having to pay taxes on the value of the health insurance, so some extra income is added in one of the boxes on the W2 (even though it's never directly given to the employee). I could be wrong, but I think this is called Imputed Income as well. – briantist Aug 4 '15 at 2:05
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The basis of the home is the cost of land and material. That's it.

Your time isn't added to basis. No different than if you spend 1000 hours in a soup kitchen. You deduct miles for your car and expenses you can document but you can't deduct your time.

Over 2 years, you could have a gain up to $500K per married couple and pay no tax.

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I've heard of handyman type people making a living this way untaxed. They move into a fixer-upper, fix it up while living there, stay over two years and sell. They can pocket $125k/yr tax free this way assuming they produce that much value in their fixing-up. (Beware, though, that this will bite you in low social security payments in retirement!)

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