Capital Gains Help Needed
We have just sold our Primary residence after 1 year and 2 months of living in it. This was a house we had built and the construction loan was acquired in 2002.
Does the CG exclusion only pertain to the time you were "Living" in the home and not the "Loan" origination date?
Also, My wife lost her job in Jan of this year, would that fall into the category of "Change in employment" so as to not pay any CG up to the 250k? I know that if you have had the house for 2 years and you fall into one of the exclusion categories the amount of the exemption is cut in half. So 500k married will only be 250K and single would be 125K.
Dave,
I see that you are a bit confused about the capital gains exclusion rules. Let's see if I can sort out this issue with you.
The general rule is that you must both own AND occupy the home as your primary residence for two of the five years prior to the sale to qualify for the capital gains exclusion. The maximum exclusion is $250K per taxpayer. If you file separate returns, you and your wife are each limited to a maximum exclusion of $250K provided you each qualify under the two year rule. If you and your wife file jointly, you may combine your eligibility for the maximum $500K exclusion. If filing jointly, only one spouse needs to be on title, but both must meet the two years of occupancy requirement.
If you have not met the two years of ownership and use criteria, there are hardship exceptions that allow you to prorate the exclusion for the time you have actually owned and occupied the property. The hardship exceptions only apply when you fail to meet the two year rules. The day you took title is the first day of your ownership. The date of your construction loan is irrelevant to this calculation. The day you moved in and began physical residence is the first day of your occupancy.
In your case, if your ownership and occupancy are concurrent, and are now 14 months, then you may qualify for a hardship exception to the two year rule only if the loss of your wife's job created a financial situation that made it a hardship to pay the mortgage each month. You can usually claim the loss of employment created a financial hardship and put your mortgage in jeopardy if both your and your wife's income were needed to qualify for the mortgage loan. If you qualified on your own income, and your wife is not a co-borrower, then your argument may fail.
Assuming that your entitlement to a partial exclusion is upheld, you may apply 14 twenty-fourths of your maximum capital gains exclusion to the profit on the sale of your property. This works out to $145,833 filing single, or $291,666 filing jointly.[ Edited by DaveT on Date 05/25/2004 ]
Hi Dave,
Thanks for the reply.
My wife and I both are on the mortgage and both had to state incomes before the lender approved us.
So since my wife was let go we really cannot afford the house anymore. I drive more than 40 miles one way to work and back. We are moving closer now to my J.O.B.
I had this job before I built this house so the mileage wouldn't help here anyway, I think.
She is now working our REI business full time from home.
So are you saying I could use the Change of employment status hardship?
Thanks
If your wife's loss of job and the reduced income means that continuing to make the monthly mortgage payment will create a financial hardship, then you qualify for a partial capital gains exclusion under one of the exceptions to the two year rule.
DaveT,
By selling my house I have a difference between the payoff and the sale price of about 50K. Now What I put down on the house, extras I have put into the house all come out correct? so lets say a total profit of 25K. Do I get taxed on this 20K ?
Thanks again
I guess this is a hypothetical question since we have already determined that you most likely qualify for a partial capital gains exclusion.
The difference between your loan payoff and your sale price is irrelevant.
Your gross taxable profit is the difference between your purchase price and your sale price. You now subtract the cost of any capital improvements you made to the property and the costs of selling (real estate commission for example). What you have left is your NET taxable profit. As long as your net taxable profit is less than your allowable capital gains exclusion, all of your profit will be tax free.
Fixup costs to make the property ready to sell (such as painting) are not deductible from your profit.
Thank you Dave.