Do I Pay Capital Gains Or Not?
Hello all. I purchased my primary residence in 11/04 and after living in home for a few months it has become clear we need a bigger place. I am looking to make a sale by owner in order to save the commission, therefore, making a trade up possible. If i sold today at a profit and and used this profit for a down payment on a larger home (strictly for trading up), would i be liable for paying capital gains on the profit?
I know there is a 2yr use/ownership rule for tax free profit but in my scenario i dont think i can wait 2 years. If capital gains tax is to be paid..how can i figure what rate would apply? thanks in advance for your help!
If your primary residence is held for less than a year, the gain on the sale is taxed at your ordinary income tax rate. If it is owned for one to two years, the rate is 20%; but if it were purchased after 2001, the rate is 18% If however, you own the home as your primary residence for two or more years, the first $250,000 in profit (and $500,000 if married) to be completely tax-free.
Thanks for the info. and help. yes i actually got a decent deal since the seller was in a rush to sell. i expect about a $18k gross profit (based on recent home sales on the same street/home size/condition).Since i will do a fsbo and after paying any taxes due, i figure i should still be okay with the purchase/financing of a larger home.
Thanks again and you guys are great.
Quote:
In the absolute, most extreme, worst case outcome possible, you could be convicted of tax evasion and have your primary residence relocated to a federally funded gated community.
Wow, that sounds great! Is there an Activity Center or golf course?
Just kidding, i get it. Thanks for the post, NewKid.
Refer to this article entitled "Holding Requirements for 1031 Exchange Property" posted on this web site: http://www.thecreativeinvestor.com/commercial/modules.php?name=Articles&file=article&articleid=572
[addsig]
Hopefully wexeter will weigh in as this could get a bit sticky.
Anyway, for the 121 exchange, you have to own the property for two years not five. If you live in a property for two years and then reant it out for three years, you can then sell it under the 121 exclusion as owning it for two years out of the last five of ownership.
If memory serves correctly, to actually use the house as a primary residancy after doing a 1031, you need to wait three years after the 1031 exchange in order to avoid the IRS from claiming that your transaction was done soley for the purpose of avoiding the tax. I think in your scenario, that you would come out owing tax because you were way over the 500K mark. I did the math in my head real quick so I could be wrong.
Joecrane,
I guess you have not kept up with the tax code changes. As it stands now, property originally ACQUIRED in a 1031 exchange then converted to a primary residence does not qualify for section 121 until both:The property has been occupied as the taxpayer primary residence for two of the five years prior to the sale, andThe property has been owned by the taxpayer for five years prior to the sale.I would further argue that once the property is acquired in a 1031 exchange, only one year of investment use is needed to validate the exchange before converting to a primary residence, however, I would prefer a two year investment use before conversion.
Pay tax on the amount of depreciation for the property (25% since May of 97 I believe).