I Want To Buy A House, But Will Capital Gains Affect?
I have a house that I want to buy here in Texas but I have a problem. Maybe someone can shed some light on this for me.
His house is retail at about 110k and he
bought it almost 3 years ago NEW and I want to buy it. He paid cash for this house and told me he can't sell it to me for 2 more years due to him being charged a capital gains tax (or so I assume he is speaking of) and I'll have to wait (i would move on).
My question is, I thought the rule was you had to live in a house 2 years within the last 5 years to be exempt from capital gains tax. Is this true or does he have to live in it 2 years and own it for 5?
-Confused
Scott
IF the seller has owned AND occupied the house as his primary residence at least 2 of the 5 years prior to sale, his profits are exempt from capital gains taxes (in other words, tax free).
If the homeowner bought the house three years ago, and has just moved in, then he will not meet the two year primary residence occupancy requirement yet. Then, in this specific circumstance, he is correct that his sale profit will not be tax free until two more years have passed.
If you are sure the seller is eligible for the capital gains exclusion but the seller is not convinced, offer to pay his capital gains taxes when they become due. Make it part of your purchase offer. Might be the deal clincher.[ Edited by DaveT on Date 01/11/2004 ]
Dave,
Thanks for the info.
He has lived in the house since it was built 3 years ago. Im having trouble convincing t\him that he will not have to pay capital gains on the house. He seems to think that he has to not only live in the house 2 year, but also has to have lived in it for the last 5 years.
Im having trouble relaying this info to him due to his age (70) and he is very frugal.
I found the article about capital gains (written in Legal lingo), but its greek to me. )
I might try putting a clause in the contract about me paying the gains if necessary. Thanks!
Scott
Scott,
You never said that the house you want is for sale. Are you dealing with a homeowner who is unmotivated to move, much less sell his home?
Dianne Kennedy has a great article somewhere that you may consider printing and giving to the homeowner. I'm sure google will assist you in finding it.
Dave,
Interesting enough, he had his house for sale when I found it and has since been removed from the MLS and has unpacked due to thinking he has to live in the house for 5 years. I am going to talk to a tax attorney tomorrow and a realestate attorney and see what I can do about convincing him that he can sell the house. He isn't aggressively motivated, but I talk with him every so often and he wants to sell. If I can produce adequate paperwork to suffice my claims, he will sell.
Thank you all for the responces and helpful information. Btw, this house is for my future home, so I am not trying to do creative investing for this particular house. I just want the bugger to move out. )
Scott
Scott,
Download and print IRS Publication 523, then highlight the OCCUPANCY and USE TESTS on page 9.
http://www.irs.gov/pub/irs-pdf/p523.pdf
I think the language is clear and straightforward. Since it is from an IRS Publication, you should have no problem with creditability.
If the seller is still in doubt, offer to pay for a 30 minute consultation with any tax attorney the seller chooses for his "second" opinion. It might not hurt to find out where the seller got the information that changed his mind about selling. If a trusted family member or close personal friend is the source, you may have to re-educate someone else before the homeowner will believe he has no capital gains tax consequences at this point in time.
You can present all the articles you want to no avail. Ask him if he has an accountant or some financial guy he trusts. Take him to that individual personally to get it from the horses mouth so to speak.
My gut feeling is that he really isn't motivated to sell. Question: You want to buy a house at RETAIL value??? That's virtually unheard of on this site. Sales in Texas (I'm told are slow to stagnant). If you want to buy a home at retail you can do so via a Realtor who should have thousands of them for your selection.