Capital Gains/personal Residence?
I have lived in my house for 14 months and am moving. I will profit 100K upon the sale of my house and would like to invest in other properties. I know that if I had lived in my house for two years, I would not have to worry about the CG. Since I plan on investing the profit, can I do a 1031? If not, how can I avoid paying CG on my house? Should I rent it out and then sell it as an investment property? Please help.
I know I'm a little new at this myself, but from what it sounds like to me, you are definately on the right track. While I don't know anything about a 1031, I do know that you do have a lot of options. If you can invest in real estate with out using the 100k, I would reccommend renting or lease optioning the property. A lease option would give you a buyer that would close at the end of a year or two. Since you generally charge a lease option more than regular rent, if they walk away, you've made extra money in rental income. Also, a portion of that money is tax deffered. If you decide just to rent it out and have a good tenant, you could look for an investor that would want the property with a tenant in place. Not all investors like the property occupied when they buy it, no matter who the tenants are, so be advised. If you wanted to rent/lease option the property and still have money to invest, consider refinancing. If you do refi. the financial analysis should still give you a positive cashflow if you are to rent or lease option unless you can carry the mortgage (when vacant) or negative cash flow and still pay for your new residence. This would not give you as much cash when you do sell, and might limit your flexabilty with certain buyers, but it is a way you can have the cash now for other financial income producing opportunites. I hope this helps.[ Edited by ibohero on Date 05/31/2004 ]
Thanks for the reply. However, I want to sell the property because I feel that now is the right time to sell it. (the neighborhood is declining, it is currently a sellers market, etc.) I don't want to sell it and then pay a big CG tax on it because I havent lived there for 2 full years. Can anybody answer my question about doing a 1031 on it?
You have been there >12 months so it is at least LT cag gains. Is 15% that bad?
Can you do anything to increase the cost basis, to minimize the tax?
Pay a consulting fee for assistance in preping and marketing the place for sale.
If I was to put a renter in there, how long would I have to hold it as an investment property before I could do a 1031 on it. I am a new investor and 15% seems like a lot to me. I would rather not pay it if I don't have to. I appreciate all your advice.
1031 is for like to like transactions.
You would be selling an income producing property and reinvesting the sale proceeds in another. Not exactly that simple but the idea is you are not talking about your residence.
If you sell your residence and it has been less then 2 years there are some specific conditions where the tax exemption still applies. Ask a tax advisor. My tax attorney had to look at this for me in the past. I believe job relocation is one of the exempted categories.
15% is not that much. If you roll the funds forward and then the tax rate goes up you might be worse off. Granted 15% saves now and then compounded will likely be a better deal in many cases.
If you rent it one test is to rent it long enough that it shows up on at least 1 years tax return as an investment property. You can even rent it for over a year and still claim it as your residence if you like as the rule about you living there allows for gaps.
My biggest advice is do not get so wrapped up in tax optimization that you miss out on a more profitable solution. Maybe buying another place is better then holding the one in the present area. Maybe refinancing while living there and holding it long term allows you to hold it and get much of you 'profit' out.
John
[addsig]
The sale of your personal residence and acquiring replacement rental property are not like kind property - one is for personal use and one is for investment. You can certainly rent out your current primary residence for a period of time and then sell it and do a 1031 exchange, but you do not currently qualify.
You may qualify for an exemption for the 121 exclusion even though you have not lived there for 24 months.
Otherwise, you need to evaluate your tax liability and determine if it is worth incurring the tax.
If you are moving to another area or need to sell be cause of hardship (illness, loss of job, etc) The IRS has ruled that in some cases you can prorate the gain ($250,000 for single, so the $100,000 could be tax free). Check with your accountant to see if any of these situations apply.
<NOT AN EXPERT!>
Couldn't he buy another house with the cash from the sale of the first? After that's settled, a home equity loan would allow him to pull out money to invest wouldn't it?
Please, correct me if I am way off base...
[long]
Couldn't he buy another house with the cash from the sale of the first?
as soon as the sale of the 1st home closes, there's a taxable event.
I found this outlines to qualify for the partial exemption. lots of weasel room.
CHANGE IN PLACE OF EMPLOYMENT has been defined in several ways.
A) A move where the new commute would be at least 50 miles more than the old commute. If I had to drive 27 miles to work from my old home, and my new job is 65 miles from the old home, I do not meet the 50 mile longer rule. (If the commute from my old home to the new job location is 78 miles, I meet this test.)
[Many professionals expected this 50 mile rule (as it is the same for deductibility of moving expenses). IRS has adopted this as a "safe harbor" (which allows automatic qualification). If you qualify under this 50 mile test, you are safe.]
The IRS has elaborated further:
a move for an unemployed person to a job location at least 50 miles from his old home;
a job transfer;
a new job; and
new self-employment, also qualify.
The change in place of employment must take place while the home is personally occupied. [If I lived in the property for a year, a couple of years ago, and then turned it into a rental, and later my job location changes while I hold it as a rental, I do NOT meet the safe harbor test.]
B) IRS has also stated that failure to satisfy the 50 mile safe harbor is not fatal, if other circumstances make it clear that the primary reason for the sale of the old home is due to a change in job location.
NOTE WELL: Whose job location must change?
The taxpayer, his spouse, a co-owner of the home, or another resident of the home.
IRS examples include an emergency medical technician who is on-call and lives 4 miles from the hospital. She changes jobs to a hospital 40 miles away and sells her old home to live close to her new job. She fails the 50 mile test, but qualifies under the "other circumstances" test: she proved that move due to her job location change.
CHANGE IN HEALTH has been defined in several ways:
To obtain, provide, or facilitate diagnosis, cure, mitigation or treatment of a health condition, or personal care.
Moving to a new climate for specific health reasons (the allergist said that the cold damp climate aggravates my asthma; I should move to the dry desert) qualifies. However, a move to the desert for my general health (since I will be able to get more outdoor exercise which is good for my heart condition or general health) is NOT sufficient (since I do not have to move to exercise - I can exercise indoors at my old home).
NOTE WELL: Whose health do we look to?
The taxpayer, his spouse, a co-owner of the home, or another resident of the home, PLUS certain other close family members (or their spouses, co-owners, residents). This means that if I move so I can be close to my ill mother and help give her personal care, I QUALIFY.
UNFORESEEN CIRCUMSTANCES
IRS has given us a very nice provision. The following are safe harbors:
Death
Loss of job resulting in collecting unemployment
A change in employment (or self-employment) causing inability to pay housing and living expenses
Divorce or legal separation
Multiple births from the same pregnancy
In addition, a sale after a natural / man-made disaster is qualified.
OTHER UNFORESEEN CIRCUMSTANCES:
In addition, any other not reasonably foreseeable circumstance causing the property to be unsuitable as the principal residence, or making the residence unaffordable, now qualify.
IRS examples include a person who buys a home on a busy street, only to find it is too busy and noisy. This condition is foreseeable so it does NOT qualify.
A more favorable result is when Diane and Ed, an engaged but unmarried couple, buy a home. If they break up, and Ed moves out, this qualifies as an unforeseen circumstance entitling both to the Reduced Exclusion.
RETROACTIVITY
Crazy - that very last paragraph is exactly what I'm just not going thru. We want to sell the place, but I was bummed about CG taxes. I love it - "Unforeseen Circumstance." Problem solved. :-D
Quote:A more favorable result is when Diane and Ed, an engaged but unmarried couple, buy a home. If they break up, and Ed moves out, this qualifies as an unforeseen circumstance entitling both to the Reduced Exclusion.Let's clarify, both are entitled to a partial exclusion if both were on title together.