Avoiding Capital Gains Taxes
If I build a house, live in it for two years, and then sell it
for a net profit of $1,000,000, will I have to pay capital
gains taxes past the $250,000 exemption? I would like to roll the profit into a new house or lot with the intention to build another house. Any options would be appreciated. Thanks.
I definitely plan to talk to a tax professional. However, I am curious to see if there are any ways to structure this so I could re-invest instead of getting hit hard on taxes. Does anybody know if I could rent it out for a year after I live in it for two years? I was thinking maybe
I could then do a 1031 exchange. Thanks.
Yes, you can move out of the property after you have lived in it, convert it to a rental property and rent it for say 12 to 18 months or more so that it would be classified as rental or investment property.
There is a new Revenue Procedure out this year that would allow you to use the Section 121 Exclusion ($250,000 exclusion) first provided that you lived in the property at least 24 months out of the last 60 months prior to the sale, and then defer the remaining capital gains via a 1031 exchange provided the property is rental or investment property at the time of sale. It is Revenue Procedure 2005-14. I would be happy to email you a copy if you are interested.
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wexeter: I am impressed and obviously stand corrected.
I found a link that shows examples.
http://www.diversifiedexchange.com/rev_proc_2005_14.asp
no relation to the company but the examples are good.
Just read over Revenue Procedure 2005-14. I did not notice any minimum time requirements for having the property rented after using it as a personal residence for two years. Would one month suffice?
There are no stated minimum holding or rental periods in the 1031 exchange code or regulations, but the 1031 exchange regulations do require the investor to have the INTENT to HOLD the property as rental, investment or business property. The investor would have to prove under an audit that he or she had the intent to hold the property as stated above. The best way to prove that you had the intent to hold is to do just that and hold the property as rental or investment property. The majority of experts, including myself, recommend a 12 to 18 month holding period or more in order to demonstrate that you had the intent to hold. The reason for the 12 to 18 month holding period is three fold. Congress was considering a 12 month required holding period over a decade ago, which never made it out of committee and therefore never passed. The 12 month period typically straddles two tax returns/years so two tax returns will show rental income, expenses, depreciation, etc. Finally, the 12 month period is the difference between ordinary income tax rates vs. capital gain tax rates. Holding the property for only one month would make it very difficult, if not impossible, to prove that you had the intent to hold the property for rental or investment purposes.
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