Capitol Gains Tax
I bought my house in december of 03 for around 175,000 I want to sell it and buy a bigger house for about 250,000 to 300,000 can i use the money i make off selling my house to buy a bigger house? do i have to pay tax on the profit if i use it as a down payment for a new house? can i keep any cash tax free?
please help.
need to live in the property for 2 out of 5 years to get rid of capital gains taxes (again that is capital, not capitol as in Des Moines is the Capitol of Iowa)
So I get taxed even if I am going to use the money to buy another house with it?
Is there any way around it?
(Thanks for the spelling /grammar lessons.)
Quote:
On 2004-07-30 16:02, wrote:
I bought my house in december of 03 for around 175,000 I want to sell it and buy a bigger house for about 250,000 to 300,000 can i use the money i make off selling my house to buy a bigger house? do i have to pay tax on the profit if i use it as a down payment for a new house? can i keep any cash tax free?
please help.
DRASH,
Assuming you are talking about your personal residence, a sale now is a taxable event. If you sell before December 04,.all your profit is taxed at your ordinary income tax rate. If you sell after December 04 and before December 05, your profit is taxed at the long term capital gains tax rate that applies to your tax bracket.
If you have lived in your house for at least two years and sell after December 05, the first $250K of your profit (per taxpayer) will be tax free. There is no requirement to reinvest your profit in a new home. Avoiding a taxable sale only depends upon how long you have owned and occupied the property as your primary residence prior to the sale.
Hold on a second...
This is my understanding....
For tax free capital gains cash, you need to live in your house for 2 years or more OF the last 5 years to keep the capital gains tax free.
Unless you use the cash to purchase another equal or greater- in-value property!!
If you sell your house before 2 years, like your doing, then put your capital gains into a 1031 tax account and put it towards the new house when you purchase it. I think you have something like 90 days to use the 1031 money with a equal or greater real estate purchase.
GURUs, am I right or wrong?!
[ Edited by paulr72777 on Date 07/30/2004 ][ Edited by paulr72777 on Date 07/30/2004 ]
I thought that because this is my personal place of residence a 1031 could not be used. I heard that a 1031 is only for business and investment property.
paulr72777,
Let's address each of your questions individually.
Quote:For tax free capital gains cash, you need to live in your house for 2 years or more OF the last 5 years to keep the capital gains tax free.You are partially right. You must BOTH own AND occupy your home as your primary residence for two of the tive years prior to the sale to qualify for the capital gains exclusion on the sale of your primary residence. Since DRASH bought the home in December 03, he will satisfy the two years of ownership requirement sometime in December 05. In my response, I also said that he had to have occupied the property at least two years prior to the sale as well. The earliest date that he might satisfy the two years of occupancy requirement is also sometime in December 05.
There is a limit of $250K per taxpayer on the amount of profit that can be excluded from capital gains taxes. Profit that exceeds $250K per taxpayer is still subject to long term capital gains taxes. For most homeowners, this limit will shield all of their profit, but I can imagine some high cost and high appreciation areas like CA or NY where the sale profit might actually exceed the capital gains exclusion.
Quote:Unless you use the cash to purchase another equal or greater- in-value property!!The IRS repealed the residence rollover replacement rules in 1997 and replaced them with the two year rules we have today. Congress also eliminated the requirement that your sale proceeds had to be reinvested into another primary residence to qualify for the capital gains exclusion.
Quote:If you sell your house before 2 years, like your doing, then put your capital gains into a 1031 tax account and put it towards the new house when you purchase it. I think you have something like 90 days to use the 1031 money with a equal or greater real estate purchase.Your description of a 1031 exchange is slightly imperfect, but you have the general idea. However, a 1031 exchange is only available for investment use or business use property. An individual's primary residence is not eligible to participate in a 1031 exchange.
Quote:GURUs, am I right or wrong?!I am certainly not a GURU, but I hope this cleared up some of the confusion for you.
First, the question was regarding the taxpayer's primary residence and not rental or investment property, so 1031 treatment does not apply here.
Second, taxpayer's used to be able to exchange their primary residence into another primary residence and defer their capital gain taxes pursuant to Section 1034 of the IRC (a 1034 exchange). Section 1034 was replaced with Section 121.
Third, since this is the taxpayer's primary residence only Section 121 would apply (the 121 exclusion). If you live in the property as your primary residence for 24 months out of the last 60 months you can exclude up to $250,000 in capital gains if the taxpayer is single and up to $500,000 if married and filing a joint income tax return. In this case, the taxpayer has only lived in his or her primary residence for less than one year and he or she is selling merely to trade into a larger home. So, the 24 month requirement has not been met and he or she does not fall into one of the exceptions, so all capital gain taxes would be triggered.
[addsig]
Wexter,
So 1031 applies to rental/investment properties only. I understand that.
Then you say Section 1034 is now Section 121 that allowed taxpayers to 'exchange'(?) primary into another primary residence. But you make it sound like it doesn't apply anymore these days.
Then in your last paragraph, you talk about 121 applying to primary residences only, and it sounds like it falls under the 1031 guidlines.
I'm sorry, I'm confused.
Paul
Quote:
On 2004-08-01 14:40, wexeter wrote:
First, the question was regarding the taxpayer's primary residence and not rental or investment property, so 1031 treatment does not apply here.
Second, taxpayer's used to be able to exchange their primary residence into another primary residence and defer their capital gain taxes pursuant to Section 1034 of the IRC (a 1034 exchange). Section 1034 was replaced with Section 121.
Third, since this is the taxpayer's primary residence only Section 121 would apply (the 121 exclusion). If you live in the property as your primary residence for 24 months out of the last 60 months you can exclude up to $250,000 in capital gains if the taxpayer is single and up to $500,000 if married and filing a joint income tax return. In this case, the taxpayer has only lived in his or her primary residence for less than one year and he or she is selling merely to trade into a larger home. So, the 24 month requirement has not been met and he or she does not fall into one of the exceptions, so all capital gain taxes would be triggered.
Ok I hear now that if I sell my house (because it is my personal place of residence) all I have to do is buy a home that will be used as my personal place of residence for the same amount or more than I sell my current house for.
has anyone ever heard of that??
There is also a little known rule that if the sale was because of a job change, financial problem, or more than 2 babies born , or some catastrophy, and the sale was less than 2 years, the limit could be pro-rated. I am not an accountant, but remember researching that last year. Any one out there hear about this?
Yes that is true, Lenders do not like to see thest you are selling a primary residence to buy a new residence of lessor value. "Downgrading" is only permitted on a case by case basis depending on your situation. If you were selling your current home for 200,000, and wanted to replace it with a home valued at 180,000 you would need to explain this to your lender in www.detail.The reason is because of all of the real estate flipping that is going on, people are always trying to pull the wool over the lenders eyes. You tend to get better rates and program availability if you owner occupy a property, so many investors just lie to the lender and fabricate documents to show they are going to "rent out" their current residence in lieu of the new property. Lenders are catching on to this more and more, so getting a lender to believe that you are being truthful about your occupency is the hard part. 8-)
I have answered this question many times before so I wrote an article about it.
Please visit:
http://www.thecreativeinvestor.com/modules.php?name=News&file=article&articleid=415