Tax On Payment To Be Applied To House Sale If Close By Specified Date
This is not really an investment question, but this forum seems to have the expertise to answer my question. We are selling our personal home. We have a contract contingent on the buyers sale of his house that is about to expire (6 months and no sale). We would like to extend the contract but have him make a $20,000 non-refundable payment that would be applied to the purchase price if he closes by April 15, 2006.. (This is not escrow - we will be cashing the check. He is aggreeable to this). We will receive the payment in 2005. The sale, if he closes, will take place in 2006. How do we report the $20,000 on our 2005 tax return?
[ Edited by dkklrbb on Date 11/19/2005 ]
Under your circumstance, selling your home is not a taxable event. No capital gains tax. No income tax.
$90k tax free to you.
Thanks for the info. Made my day!
Quote:
On 2005-11-13 22:14, bargain76 wrote:
Under your circumstance, selling your home is not a taxable event. No capital gains tax. No income tax.
$90k tax free to you.
Your understanding of the 1031-121 rules is not quite correct.
Under the old rules, after converting your 1031 replacement property to your primary residence, you only needed to live in the property as your primary residence for two more years to become eligible for the Section 121 exclusion.
This was generally accepted to be a minimum three year period of ownership with the first year being a qualified investment property use to validate the exchange, followed by a two year occupancy as your primary residence to establish Section 121 eligibility.
In late 2004, a new rule was enacted that placed a longer ownership constraint on the primary residence that was originally acquired in a 1031 exchange. .
Here is a summary of the new rules that may clarify the issue.
For the property acquired in a 1031 exchange, the taxpayer becomes eligible for the Section 121 exclusion only after all of the following conditions are met:Use the 1031 replacement property for a qualified investment use at least one year before conversion to a primary residence, and, Occupy the property as your primary residence at least two of the five years prior to sale, and,Own the property at least five years prior to the sale.Please note that the tax code is still silent on the minimum period of investment use before converting to your primary residence, but the consensus of opinion is still at least one year to validate the exchange.
There never has been, and there still is NOT a requirement to LIVE in the property for five years, with or without the exchange.
<[ Edited by NewKidInTown3 on Date 11/15/2005 ]
NEWKID is right on the money.
There have been many articles in newspapers and magazines that have INCORRECTLY stated that you have to live in the property for five years. The LA Times and the San Diego Union Tribuine are two of those that did so.
My recommendation would be to hold the acquired property as investment property for 12 to 18 months (minimum) in order to qualify for the 1031 exchange treatment; convert the property to your primary residence and live in it for 24 months; and then once you have OWNED it for 60 months (five years) you can sell and take the 121 exclusion.
Keep in mind that the 121 exclusion will only exclude capital gain taxes and not depreciation recapture taxes, so if you have a lot of deferred depreciation recapture taxes this strategy may not be appropriate for you.
[addsig]
While you could exchange your property now, the question is why do you want to or need to?
Do you have a compelling reaon to sell this property? Is it a negative cash flow, or, in a declining neighborhood? Is the property older and beginning to become maintenance intensive?
If the answers to these questions are no, then why do you want to sell? You have a positive cash flow and a good property in an appreciating market.
How will an exchange get you ahead of where you are now? Have you located a potential replacement property with more potential than your current investment property?
It is not clear to me that you have really thought this through. If you have, please share with us how an exchange now will get you ahead.
For your strategy to hold up, you would have to prove to the IRS that your intent in acquiring the property was to hold for rental income (indefinitely).
From your explanation, it is clear to me that your intent is to sell the property for profit and to pyramid your profit into more properties. If the IRS also gets this impression of your investment strategy, then your sales will be recharacterized as dealer dispositions with all the back taxes, interest and penalties that go with it.
You will have to prove that compelling business reasons are the basis for your strategy -- reasons other than just tax avoidance.
NewKidd is right on the money. It appears that you have the intent to buy, fix and flip, so it technically does not qualify for 1031 exchange treatment. It would be very difficult to demonstrate that you actually had the intent to hold for investment, especially since you intent to repeat the process.
[addsig]
I had one follow-up comment as well. The property does not have to produce rental income, it does have to be held as investment property. It is important the the investor has the intent to hold for investment purposes, treats it as investment property and reports it as investment property.
[addsig]
Thank you, New Kid. That is a very insightful explanation. I am wondering if you could offer me some advice on a related matter. I am being urged by a friend to buy a piece of land and then use the future profits from my house to build a house on the lot in a few years. It looks like it could be a good deal, but I am curious about a couple details.
1. Does the 121 exclusion work the same way on a build?
2. Does the two-year clock start upon purchase of the land, breaking ground, officially moving in, etc.?
Thanks in advance for the help.
Thank you both for the responses. The own and occupy explanations really cleared it up for me. You started me thinking about another point: would
it also be legal to have more than two people on the title who occupy the residence(in order to take a $750K or more 121 exemption)? I have a 16-year-old son, but I assumed the 121 exemption applies only to adults. If I put him on the title(he also lives with me), and he is an adult when I sell the house, can I legally claim the 250K exemption(three times) for my daughter, my son, and myself? It seems like this could get complicated. Thanks in advance for your advice.
So if my husband lived in one owned property in CA as his primary residence and I lived in another in AZ as my primary residence, as long as we file separate tax returns, we can each exclude up to $250K on our gains? Are there disadvantages for a married couple to file separate tax returns?
So if my husband lived in one owned property in CA as his primary residence and I lived in another in AZ as my primary residence, as long as we file separate tax returns, we can each exclude up to $250K on our gains? Are there disadvantages for a married couple to file separate tax returns?
I would form a land trust, or living trust; transfer the property into the trust for estate planning purpose (no transfer tax, only recording fee for trust being on title; no problem with the lender, insurance company, etc.).
Then add the 2 children as beneficiaries of the trust, so all 3 individuals have beneficial interest. The beneficial interest resides on the property, and has also homestead exemption.
The clock for 2 years exclusion starts running then after the trust is formed, recorded on title (the beneficiaries occupy the property already).[ Edited by kittiwulfi on Date 10/12/2005 ]
kittiwulfi,
You have a couple of misunderstandings here. Let me clarify a couple of points.
Quote:what has 121 exclusion to do with jointly or separately filing a tax return. All individuals on title, who occupied the property for 2 years (within last 5 years) are entitled to capital gain tax exclusion. Only married couples can file a joint tax return. For married couples, only one spouse is required to be on title to the property, but both must meet the two year occupancy requirement to qualify for the maximum $500K capital gains exclusion when filing a joint tax return.
If the spouses file separate returns, then the exclusion is limited to $250K per individual and each individual must meet both the ownership and the occupancy requirements to qualify for the exclusion.
Unmarried owners file their own individual tax returns and each must meet the two year ownership and two year occupancy requirements to take the $250K maximum capital gains exclusion available to each individual.
Quote:The children and the lady become tenants in common because they will be acquiring the title to the property at different times, not because the children are unmarried.The lady and her children become tenants in common because the lady is not married to her co-owner(s). Joint tenancy, or tenancy in the entirety, is reserved for married couples.
Quote:On 2005-10-15 11:18, wrote:
I will quote the legal definition: kittiwulfi,
Apparently, I incorrectly equated Tenancy by the Entirety with Joint Tenancy.
I stand corrected.
Thank you for putting me on track.
Thank you, NewKid, for explaining that to me.
I can use that in my case then, too - my spouse is not on title
The original question was if the children can get 121 exclusion ... the answer is "yes", if they are on title with their mother, and occupy the property.
best regards,
Ines
The question I was really addressing asked whether a single mother could increase her maximum capital gains exclusion to $750K if she adds her two children to the title.
I hope she understands that her exclusion is limited to $250K on her tax return, while each child on title that qualifies for the exclusion would take it on their own individual tax returns.