Sale Of 2nd Home
Hello there,
This is our first time to use this great resource. Our question: we have a second home purchased in Nov.99 for $85000. We lived in it for 1 yr and 10 months and we have rent it since. Now (it was appraised for $189,000 we are considering the posibility to sell it with the hope to buy a larger more expensive home and use it as our primary residence. Can this be consider a like kind exchange? or would it be better for us to buy the new one and rented for a period of time. Then...move into it. If so, do you know how long would we need to rent it for? any suggestions
Not quite sure I am following your question as I am not familiar with "like kind exchanges", but I do know that if you do not live in the home for at least 2 years, you will pay Capital Gains tax of 15% on the $104K gain. Now, your current home would be different story since you have lived there since Sept 01.
I would just sell both homes, pay your taxes, and then find a larger kick ass home to live in. I don't think you want to buy another more expensive house and try to rent it until you are ready while you already own two other homes. Sell all of them and buy your PALACE!
Too bad you did not live in this house for 2 years as your primary residence. If you had you could have taken the profit untaxed ($250,000.00 if single,$500,000.00 married filing jointly). If you sell now you will pay long term capital gains on your profit. [ Edited by MichaelChandler on Date 04/02/2004 ]
I am not an accountant so please verify the following suggestion w/yours.
Having said that, here is what I think you should do. Move back into your house. The previous post is correct; 2 years owner occuppied = tax exempt (with the above mentioned limits on the gain). More specifically, the tax code states a property owner occuppied for 2 of the last 5 years. I do not recall the word "consecutive" as being in the code. In other words, you need to owner occupy the property for two more months. Do it and you should be capital gains tax free on your profit.
Please also note, you absolutely cannot use a 1031TDExchange on owner occuppied property. It is strictly for investment property.
Most correct move back in and qualify correctly. Now on sale tax free.
Your new residence which of course will be more expensive and larger. When you move in do so with the idea in mind that for at least the next five years you will so there reside. I would if possible try and charge some business expense to this new residence by having a home office and with great care charging off items as portion of business expense.
I suggest this in view of some upcoming legislation which will come before the house within the near future and this path of conduct may be the cause of a nice future tax break.
Lucius 8-) 8-)
Lufos,
Pending changes to the tax code concerning additional "home deductions"- Please elaborate.
olucymc,
This question is frequently asked and answered in the Tax Forum. Depending upon your objectives, there might be more than just one solution. I will answer the questions you asked here, but please bring followup questions to the Tax Strategies Forum.
Quote:Our question: we have a second home purchased in Nov.99 for $85000. We lived in it for 1 yr and 10 months and we have rent it since. Now (it was appraised for $189,000 we are considering the posibility to sell it with the hope to buy a larger more expensive home and use it as our primary residence. Can this be consider a like kind exchange?No. A primary residence is not eligible to participate in a 1031 like-kind exchange. Your rental property is eligible to participate as the relinquished property, but you must replace it with another investment use property to complete a valid exchange.
Quote: or would it be better for us to buy the new one and rented for a period of time. Then...move into it. If so, do you know how long would we need to rent it for? This is where multiple solutions to your question come into play. Because you don't tell us what plans you have for your current primary residence, we don't know what would be better.
But to answer the question you asked, the answer is yes if you are just trying to execute a valid tax-deferred exchange. The replacement property in your situation must be held for a qualified investment use. The tax code is silent on the length of time you must hold the property as an investment before you convert it to a primary residence. Many tax advisors say one year is sufficient, though I say you should take the related party rules on exchanges as precedent and hold the property for investment use for two years or more. Other, more conservative advisors suggest that the statute of limitations on auditing your tax return expire after three years, so they suggest three years investment use before converting to personal use.
Other responses suggested you move back into the property for awhile to reestablish the primary residence character. If you are able to move back into your former primary residence and occupy it for another few months until it is sold, then, as long as you go to settlement before Nov 2004 and you have aggregated 24 months of occupancy of the 60 months prior to the sale, your capital gains exclusion is intact.
When you do this, you still have the issue of what to do with your current primary residence. If you requalify your former primary residence for the capital gains exclusion, then your current primary residence is not eligible for the capital gains exclusion for another two years. You will have to convert it to a rental unless you want to sell it and pay the capital gains taxes (if you have any profit).
Perhaps, you should just keep your current rental property as a rental (assuming it is generating a healthy cash flow). Sell your current primary residence and take the profits tax free, then buy your new house. If you need more money than your current primary residence will yield in profit, consider refinancing the loan on your rental property to cash out some of your equity. Refinancing to take cash out of your equity is a tax free event.