Captial Gains Tax

[dianecside]

We sold our home in Florida in July, 2005 and bought a home in Louisiana in October, 2005. We lived in the home in Florida for a little over 2 years before selling. We did not put all the money (capital gain?) from the home in Florida into the purchase of the Louisiana house. Since we lived in the Florida house for over two years, is the money from the sale of it still capital gains? We only put $50K down on the house in La. The rest went to pay off bills and moving expenses.

[Jim Johnson]

We sold our home in Florida in July, 2005 and bought a home in Louisiana in October, 2005. We lived in the home in Florida for a little over 2 years before selling. We did not put all the money (capital gain?) from the home in Florida into the purchase of the Louisiana house. Since we lived in the Florida house for over two years, is the money from the sale of it still capital gains? We only put $50K down on the house in La. The rest went to pay off bills and moving expenses.

First--- welcome to MB!


When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes.



Another bonus of the new rules: You don't have to buy another home with your sale proceeds. You can use the money to travel to Europe in style, buy an RV and drive across the country or get all those designer shoes you never could afford before.

Even better, there's no limit on the number of times you can use the home-sale exemption. In most cases, you can make tax-free profits of $250,000 (or $500,000 depending on your filing status) every time you sell a home.

First, the property you're selling must be your principal residence. That means you live in it. This tax break doesn't apply to a house or other property that you have solely for investment purposes. In those cases, the usual capital gains rules apply.

You can, however, turn a rental house into your primary residence, making the sale of it eligible for the exclusion. This is accomplished when you meet the IRS use and ownership tests.

[dianecside]

Whew!! Thank you for that wonderful information!! My husband kept saying we would have to pay capital gains tax, but my broker said we didn't. So...many thanks.

[mike_mn]

One clarification on the 250k/500k exemption.

You can do it as many times as you want, but can only use it once every 2 yrs.

There for, you cant make your primary residence your cabin up north for 2 yrs then sell both your cabin and your home in the city at the same time, get the expemtion for both around the same time and buy a big place in florida with your tax free money. Even though you have lived in both homes for 2 of the last 5 yrs, you can only use the exemption once every 2 years.

Another new thing I have learned about this exemption recently...the tax code is not boring to me,I used to read the phone book as a kid for fun...anyway, if you want to move into a property you are renting, live in it for 2 yrs and then take the 250/500k capital gains exemption you can do it, however, if the property you are moving into was aquired as a result of a 1031 exchange, you must live in the house for 5yrs to get the exemption, also, you will still have to recapture all depreciaiton no matter what. The only thing you get out of is the capital gains tax. - http://www.irs.gov/publications/p523/ar02.html#d0e5646

[Dan Auito]

I concur on all of the above. It is in fact the IRS gospel and can be relied upon as accurate. Congrats!

[Debbie]

This is slightly off topic.....I don't recall where I read it but something to do with homestead involving with home-sale exemption? Perchance anyone might know what I "don't know what I'm talking about"? Plus, what exactly is and how to do homestead?

[mike_mn]

Homestead is synonymous with the place you call home, or your primary residence.

Another common use for Homestead is for property tax purposes. In states where the property tax rate is different for Homesteaded and non homesteaded properties, this is important. Not sure if it is across the board, however, in minnesota for property tax purposes, to homestead a property you do not need to live in it, but a member of your family does. For example, if you lease a unit to your child, sister, mother, grandmother(not sure how far out the relationship goes, but you can claim the property as homestead for property tax purposes only. This has nothing to do with federal income taxes version of Homestead, related above. Homestead in the sense of fed and state income tax means you live in the house as your primary residence(you get mail there, driver license address is there etc...), otherwise it follows the second home or investment property classifications of the IRS.

[Debbie]

Homestead in the sense of fed and state income tax means you live in the house as your primary residence(you get mail there, driver license address is there etc...), otherwise it follows the second home or investment property classifications of the IRS.

Hmmm, I don't recall our primary residence being homestead. Or, should I say, I don't recall seeing the word "Homestead" anywhere in our real estate/legal papers involving our primary residence. Should that be a concern?

P.S. - I'm sorry Diane---I'm not trying to hijack your thread. It'll get back to original topic....

[mike_mn]

Maybe I am confusing you...

Homestead = owner-occupied = I live here = primary residence

If your state charges a different rate for homestead and non homestead property taxes, the person that shuffled papers in front of you when you bought your home, would have told you to go to the city hall and file your homestead papers. It is a one time operation...If your state doesnt classify homestead vs non homestead, then there is nothing to worry about...

Nothing in any of your papers would say anythign about homesteading, unless you needed to file at the city hall. you would have been told about it...

For IRS purposes, the home you call your primary residence is whatever one you tell them it is. You only have to prove if they ask you about it. Hence the reason to have your DL address and your bills and things come to the house you are claiming as your primary residnece. That is your proof.

If you are worried about your property taxes, call the city or county and ask them if there is a different rate for homestead and non homestead and check to see which you are classified as.

[SlumLordMike]

In most cases, you can make tax-free profits of $250,000 (or $500,000 depending on your filing status) every time you sell a home.

My understanding is that you can profit up to 250/500k per lifetime regardless of how many sales it takes to get there, but once you have profited 250/500k the rest is taxable.

[mike_mn]

Found here:
http://www.irs.gov/publications/p523/ar02.html#d0e1908

Excluding the Gain

You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion, next. To qualify, you must meet the ownership and use tests described later.

You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale.

***********************

Maximum Exclusion

You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.

*

You meet the ownership test.
*

You meet the use test.
*

During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed.

You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.

*

You are married and file a joint return for the year.
*

Either you or your spouse meets the ownership test.
*

Both you and your spouse meet the use test.
*

During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.

If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property.

(above is the juice of the exclusion, note that to get the 250/500k deduction you have to meet these criteria...no criteria that the amount carries over to another house.)

**************************

Ownership and Use Tests

To claim the exclusion(meaning the 250k/500k exclusion), you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

*

Owned the home for at least 2 years (the ownership test), and
*

Lived in the home as your main home for at least 2 years (the use test).

************************

More Than One Home Sold During 2-Year Period

You cannot exclude gain on the sale of your home if, during the 2-year period ending on the date of the sale, you sold another home at a gain and excluded all or part of that gain. If you cannot exclude the gain, you must include it in your income.
Exception. You still can claim an exclusion, but the maximum amount of gain you can exclude will be reduced, if the reason you sold the home was:

*

A change in place of employment,
*

Health, or
*

Unforeseen circumstances (as defined earlier).

For details about this exception, see Reduced Maximum Exclusion, earlier.

[wexeter]

SlumLordMike,

The laws changed in 1997. The one time excemption was replaced with Section 121 of the Internal Revenue Code. Section 121, or the 121 exclusion, allows homeowners to sell their primary residence and exclude up to $250,000 in capital gains ($500,000 for a married couple) from their taxable income as long as the homeowners had owned and lived in the property as their primary residence for at least twenty four months out of the last 60 months (2 years out of the last 5 years). Homeowners can use the 121 exclusion once every two (2) years.

There are also ways to combined the 121 exclusion with a 1031 exchange.

[SPIVALAW]

SlumLordMike,

The laws changed in 1997. The one time excemption was replaced with Section 121 of the Internal Revenue Code. Section 121, or the 121 exclusion, allows homeowners to sell their primary residence and exclude up to $250,000 in capital gains ($500,000 for a married couple) from their taxable income as long as the homeowners had owned and lived in the property as their primary residence for at least twenty four months out of the last 60 months (2 years out of the last 5 years). Homeowners can use the 121 exclusion once every two (2) years.

There are also ways to combined the 121 exclusion with a 1031 exchange.


I agree. Also...

CHANGE RENTALS TO HOME AND SELL TAX FREE: You can convert a rental house to your personal residence and later sell it tax free (under IRC 121 exclusion).

Warning: If you acquired the rental property under a 1031 exchange, Congress has extended the previous rule of two years to now require that you hold the property for five years.

I am not positive that the IRS won’t interpret this as five years plus two years. It seems to me that if the rental house was not acquired under a 1031, that you could sell it after two years, tax free under a 121 exclusion. In any event, you can always 1031 the rental house. Confused yet? Ask a tax advisor.

[SlumLordMike]

The point I was chiseling on was whether or not you can exclude the 250k/500k on every sale vs. exclude up to 250k/500k cumulatively in your lifetime.

I.E. - If I sell my primary today as a single person and exclude a 249k gain, when I sell my next primary home 2 years from now will I be able to exclude just 1k gain or do I get to exclude the whole 250k again?

What I have heard is you get to exclude 250k cumulatively per lifetime, not per sale. I hope I heard wrong.

[wexeter]

Yes, you heard wrong. You are allowed to exclude the full $250K/$500K once every two (2) years. It is not cummulative. So, if you sell a primary residence today and exclude the entire capital gain of $249,000 you can sell your next primary residence two years later and exclude up to $250,000 again.

[Debbie]

Isn't that great news honey-pie?!?!?!

[SPIVALAW]

Someone told you a combination of the new and old law.

Tax code gives us a few goodies!!

[SlumLordMike]

Yes, you heard wrong.

Oh Lawdy Lawdy, LAWD! I'm LOVIN' it! That is great news.

I may be able to retire in this lifetime yet. Thanks for the clarication and thanks for the love Deb. With this new knowledge I can't wait to get back out there and relieve some grieving sellers from their troublesome burden.

Of course then again, now that I am further "learned' I am itching to sell too. I just have to start moving into the rentals first ;)

Thanks all

SLM

[Aldo]

I'm going to suggest talking with your tax guy/gal. My understanding is that this is a cumulative, lifetime exemption. Unless I'm misinformed, 249+1 is your current lifetime limit.

[SPIVALAW]

Nope NO limit!!!! You can sell every 2 years.
again and again and again...

I have an uncle who is on at least his 5th home sale, NO TAXES!!

$250K per person and $500K per couple NO taxes!!

GO straight to the source www.irs.gov

http://www.irs.gov/irb/2005-07_IRB/ar10.html

Section 121(a) provides that a taxpayer may exclude gain realized on the sale or exchange of property if the property was owned and used as the taxpayer’s principal residence for at least 2 years during the 5-year period ending on the date of the sale or exchange. Section 121(b) provides generally that the amount of the exclusion is limited to $250,000 ($500,000 for certain joint returns).

see also: http://www.irs.gov/pub/irs-pdf/p523.pdf
************************************************** **

RULES REGARDING HOME SALES
In general, taxpayers recognize all gains on the sale of property, including homes. Because a home does not fall within any of the exceptions to capital asset classification, any gain arising from a sale is subject to preferential capital gain rates. To promote home ownership and in recognition of the difficulties of ascertaining a home’s tax basis, Congress has traditionally offered homeowners numerous tax benefits.

Under current law, taxpayers can exclude from income the first $250,000, or $500,000 in the case of joint filers, of gain on the sale or disposition of a personal residence. For this exclusion to apply, however, two conditions must be met. First, the property must be the taxpayer’s principal residence (that is, the property the taxpayer occupies the majority of the time). Second, the taxpayer must have owned and used the property as a personal residence for two or more years of the five-year period ending on the date of the sale of the property.

The exclusion of the gain from income under IRC section 121 is not a one-time offer. Taxpayers can use it every two years, as long as they’ve met both the required conditions. If a taxpayer has experienced a change of employment or health or when certain other unforeseen circumstances arise (for example, involuntary conversion of the residence), this two-year limitation rule is relaxed under IRC section 121(c)(2).

Even a cursory reading of IRC section 121 reveals that when Congress instituted it, the intent was to exclude the vast majority of personal residence gains from tax. But even a decade ago, Congress did not anticipate how quickly home prices would escalate. Now, with a federal budget awash in deficits, there is little discussion in Washington about raising the IRC section 121 exclusion figures or indexing them for inflation (though President Bush’s Blue Ribbon Tax Reform Panel recently recommended raising the exclusion to $300,000 for single taxpayers and $600,000 for married ones filing jointly). Thus, it is more important than ever for taxpayers to accurately track the tax basis in their homes.


************************************************** *******

NEW RULES FOR PARTIAL USE OF THE
$250,000 / $500,000 EXCLUSION
By Robert Bruss



NEW RULES FOR PARTIAL USE OF THE $250,000 / $500,000 EXCLUSION. The biggest changes in the rules for applying IRC §121 occurred on the topic of partial exemptions when the residency doesn't meet the full two out of the last five years test. To illustrate, if a home seller lived in their residence only 12 months after purchase, a 50% exclusion up to $125,000 (50% of $250,000) for a qualified single owner, or up to $250,000 (50% of $500,000) for a qualified married couple is available.
Although these IRS Regulations are temporary. they are likely to become permanent and can now be used retroactively for taxed principal residence sales which are still open to amend for up to three years after the income tax return due date or extension date - currently tax years 1999. 2000.2001. and of course 2002 are "open." Home sellers who paid capital gain tax on their home sale profit in those tax years should file IRS Form 1 04 OX to amend their tax returns and claim a refund if eligible for a retroactive partial exemption.

Internal Revenue Code § 121(c) says a home seller who fails to meet the full two-year occupancy test can qualify for a partial exemption if the sale is due to (1) change in place of employment, (2) health reasons, or (3) unforeseen circumstances.

Change in place of employment is defined, as expected, to conform to the moving cost tax deduction. That means a home seller can qualify for the partial exemption if a household member's new workplace is at least 50 miles further away from the residence than was their old job site. To illustrate, suppose the distance from the principal residence to the former work location was five miles. That means the distance to the new job location must be at least 55 miles, in this example, to qualify for the partial home sale tax exemption after less than 24 months of ownership and/or occupancy.

The moving cost tax deduction also has additional work time tests, such as being employed at least 39 weeks during the year after the move in the vicinity of the new job site. For self-employed persons, the minimum qualifying work time test is 78 weeks during the following 104 weeks after the job location change.

Health reasons are now defined, in addition to a physician's recommendation to the homeowner or a family member for a move due to health reasons, to include additional purposes such as (1) to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual (defined as the taxpayer, spouse, residence co-owner, and certain other family members living in the residence), and (2) need to move to care for a family member. However "a sale or exchange that is merely beneficial to the general health or well-being of the individual is not a sale or exchange by reason of health."

Unforeseen circumstances now include several "safe harbor" principal residence sale reasons which the IRS will not challenge. The first five reasons must involve the taxpayer, spouse, co-owner, or a member of the taxpayer's household. In addition, the IRS Commissioner has the discretion to determine other circumstances which are unforeseen:

Death;
Divorce or legal separation;
Becoming eligible for unemployment compensation;
Change in employment which leaves the taxpayer unable to pay the mortgage or reasonable basic living expenses;
Multiple births resulting from the same pregnancy;
Damage to the residence resulting from a natural or man-made disaster, or an act of war or terrorism; and
Condemnation, seizure or other involuntary conversion of the property.

[wexeter]

Aldo,

You are mistaken. It is allowed once every two years. See above post.

[mike_mn]

Keep in mind that you still must recapture the depreciation during the time it was used as a rental even if you make it primary for 2 yrs or 5yrs on a 1031 exchange property. The 250/500k deduction per property is for capital gains tax only.

Even if you didn't depreciate the property while it was used as a rental, the IRS says deprecitaion you were supposesd to take, while it was a rental, must be recaptured upon sale of the property.

Spiva and wexter can confirm this.

[wexeter]

I agree. Depreciation will be recaptured using this strategy.

[SPIVALAW]

recapture at 25% + state tax.

[Terry CA]

NOW for the BRIEF ANSWER to the question above..for those that don't want to read through the "manuals" posted but yet want "proof" from official IRS site:

If I take the exclusion of capital gain tax on the sale of my old home this year, can I also take the exclusion again if I sell my new home in the future?

With the exception of the 2-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of your principle residence so long as you meet the ownership and use tests.

http://www.irs.gov/faqs/faq-kw140.html

[Terry CA]

And yes..you must pay the Fed recapture rate of 25% on all depreciation the unit QUALIFIED for to be deducted while it was a rental regardless if you took it or not. Keep in mind that at the time of the sale, all "loss deferrals" can also kick in..for those of you that were unable to fully deduct them due to income, etc. while you owned.

And yes state tax is often the forgotten stepchild..in CA it can amount to an additional 10% of all taxable gain.

[SPIVALAW]

Thank you Terry.
for summarizing the manuals.

[smidgen]

Something was mentioned to me that I didn't really understand? To qualify for a 1031 Tax Exchange exemption on your taxes for a certain year you have to hold all property that you aquire threw a tax lien forclosure and never sell? Did I understand this correctly? What if you are looking to sell one piece that you have aquired in this process and the rest hold for development or rentals? Does that disqualify you for 1031 Tax Exchange exemption status? Is it all or nothing with this exemption?

Thanks

[SPIVALAW]

no
you can 1031 all but your residence.
There is a longer hold for 121 on your home if you bought it by 1031.
That help???

[smidgen]

Thanks so Much!! I was a little confused? Now I can see where it all fits in! I just need some large capital from one of my properties and then I will be able to do something great! Thanks so much Howard!!:praise:

[Burke]

And yes..you must pay the Fed recapture rate of 25% on all depreciation the unit QUALIFIED for to be deducted while it was a rental regardless if you took it or not.

Anyone know if this also applies to the portion of your house that you use for a home office? If you don't divide your house out and depreciate that portion of your house that you use for your home office, will you still owe the recapture tax?

Just curious.

Thanks,

Burke

[SPIVALAW]

I never dep home office
I just pay rent and deduct rent from company and count as unearned income to me.
If you depreciate you recapture at 25% rate.

[Burke]

Howard,

Thanks for your response. I am still curious about the recapture tax on the portion of a persoanl residence that you own that you are using as a home office. Terry's message indicates that you must pay the recapture tax on a rental property whether you claimed the depreciation or not. My question is whether or not that applies to the portion of your home that you can depreciate because you are using it as a home office but you did not claim the depreciation. Are you still on the hook for the recapture tax for that?

Thanks!

Burke

[Aldo]

I'm with Howard (as usual) on this one. The benefits of depreciating a home office simply aren't worth the effort. While there are many variables, I can see someone in a 20% tax bracket paying 25% on recaptured depreciation when the home is sold. The 20% depreciation deduction is spread over X years. The 25% tax on recaptured depreciation is a one time shot.

[Terry CA]

I wouldn't take depreciation for home office deduction so I guess I can't answer your question really. What I was referring to was soley rental property recapture.

[SPIVALAW]

My opinion from reading the tax code is you have to take depreciation on rentals or it is imputed,
Depreciating your home office is optional which I would NOT do.
There are a number of tax advantages of a home office you can do...
I will explain later when have more time.

[Judd]

Edited

[mike_mn]

OK, heres a silly question. What is capital gains tax? Is it a special tax involved with real estate sales or large transactions? Is it based on the profit you make when you leave the closing table or is it based on purchase/sale price? Example: I buy house for 100K, refi 1 year later for 250k, then sell for 300K Am I going to be taxed on the 50k i walk away from closing, or the 200k profit?


I understand the requirements for the exemption and I meet them completly. Will I have to pay ANY tax on my profit when I sell my house? The house is in Florida. Any idea what I may have to pay on 180k?

Heres another question. Lets say I buy a rental for 100k CASH. Then a year later I sell for 150K. Am I going to be taxed on the 150K or the 50K profit? Can i deduct any repair/rehab costs from that profit?

Judd,

Capital Gains tax is a rate of tax imposed when you buy something as an investment, then sell it later for profit or loss. If you sell within 12 months it is short term capital gains(loss), if you sell after 12 months, then it is long term capital gains(loss). It could be real estate, stocks, bonds, etc...Short term capital gains is taxed just like your wages from a J-O-B and Long term capital gains are less, taxed based on your overall tax bracket.

The thing that I have seen many people get caught up in is whether or not they use their own money. When you buy a house and put 10k down on a 100k house, how much did the house cost you? Did it cost 10k or 100k...100k of course. Just because you didn't shell out 100k out of your pocket doesnt mean you didnt pay 100k for the property. Also, a refinance is nothing more than borrowing money on a asset you own, even with cash out, you are borrowing from yourself. Nothing more, generally no tax implications...

So with that said, your 100k house purchased that is sold at 300k has a 200k gain, simplistically stated. There is a formula on the IRS website that shows how to calculate your 'basis'. Basis is the IRS's idea of what you effectivly paid for the property. You then subtract the basis from the IRS's idea of what you sold the property for(amother formula). This simple explanation does not take into account depreciation, FYI...

The short answer to your question is to read up on how purchase basis is calculated and selling basis is calculated. As far as can you deduct any repair/rehab costs from your profit? The answer is always, it depends, when it comes to taxes...

One thing I can say with certainty, a year or so ago on this message board, I spouted out some tax information I received from an attorney that specializes in REI and small business on this same subject and found out it to be in error. Since then, I realized that anyone you listen to about tax and business advice doesn't have to show up when/if you get audited or sued and their is little to no back lash for their errors. You should educate yourself well enough to be able to audit any professional you hire to help your business with entities, accounting and/or taxes.

I use www.irs.gov for all my info now...

[SPIVALAW]

With the law and taxes what is true today can change.

I like to visit www.irs.gov