Posted by Dave T on January 16, 2003 at 21:23:26:
A sandwich lease will not help the seller’s tax situation. The seller must occupy the property as his primary residence for two full years to qualify for the capital gains exclusion. In a lease option, the seller may still have ownership, but may not meet the occupancy test to exclude the capital gains.
30% taxed on sale of home if sold before 2 years? - Posted by Jerry-Mi.
Posted by Jerry-Mi. on January 15, 2003 at 10:33:46:
I just called a for rent ad and asked the guy if he would be willing to sell. He said he would but told me that if he did he would get taxed 30% of what he made on the house, because he has lived there for less than 2 years. He took out a home equity loan on his other house to buy this one, so he owns this propert out right. Whats that all about? I want to do a lease option.
30% taxed on sale of home if sold before 2 years? - Posted by Peter_MD
Posted by Peter_MD on January 17, 2003 at 09:50:53:
Jerry:
I feel a response is warranted. The 30% is probably because of the additional state income tax…at least I figured it when I read your original post.
I did suggest (highly recommend) that you seek professional advice and counsel from a good CPA.
For real estate investors (beginners or well-seasoned) we should always look outside of the box, creatively (within the applicable laws–taking into consideration all the rules and regulations). With that said, you need to brainstorm this situation (with all the applicable facts and circumstances-- warning, one size does not fit all) with appropriate qualified, trained, and experienced professionals (i.e., CPA and Attorney).
I’ve had numerous experiences with this situation (being that the Metropolitan DC Area - MD/VA/DC - is so highly transient). I’ve had clients live in hotel rooms until the house is sold, repaired, painted, etc. and/or until a replacement residence is completed that qualified fully for the tax exemption.
If you follow the letter of the applicable laws, in the spirit in which they are written and intended to regulate, you will have no troubles and will be protected…as long as you rely on competent professional advice and counsel.
…and of course, the regulations must be interpreted. There are opportunities for individuals to have more than one residence (interest and tax deductions afforded both) spending 1/2 time (6 months) in one and the rest in the other…but still only one sale exclusion of a principle residence allowed every two years.
And someone (who didn’t leave a valid email address) stated that a pro-rata time and amount is allowed. Yes, as Ron Star correctly states, that is allowed within the code as long as the regulations (reasons) are valid…as Ron properly stated.
Get the proper advice, based on the accurate facts, and there may be a deal in the making.
I recommend you go for it…if there is motivation on behalf of the owner/seller.
Just the way I see this issue…
Clarification - Posted by John W-CA
Posted by John W-CA on January 15, 2003 at 15:22:21:
Here’s the deal-
If he lives in the house for two out of the past five years, he gets the capital gains tax free. That part is pretty common knowledge.
If he sells the house short of living in it for the requisite two years, he gets to exclude a prorated amount of the gain from taxes based on his length of stay compared to the exclusion amount ($250K for single/$500K for marrieds). He might already have his gains tax free.
Example - he lives there for a year and is unmarried. His exclusion is $125K or 12 months/24 months times $250K. If he lived there for 18 months the exclusion becomes $187.5K.
As for the 30%, it sounds like he’s throwing out a rate that is around his highest marginal rate. Short term capital gains rate.
Fact is, if his appreciation is less than the prorated amount, he can sell for a complete tax free gain and start a new holding period on a new house.
30% taxed on sale of home if sold before 2 years? - Posted by Peter_MD
Posted by Peter_MD on January 15, 2003 at 12:19:36:
Jerry-Mi:
What the seller is saying is that IRS Code allows you to ignore the capital gain on a property you have used for two out of the past five years as your principal residence. Since he does not meet the IRS tests, he must report the gain on sale as taxable capital gains and pay 30% taxes.
You should consult with a CPA on this matter, however, I would, if the price and numbers work, consider a sandwich lease option (you lease option from the owner and then you lease option to a potential tenant/buyer). You can discuss this with one of the members from your local real estate club, however, if that is not possible at this time, review your educational course material and chime back to this site with specific questions you might have.
If the owner is getting close to the two year mark, this could be a potential deal that you can do. Remember, however, you must determine the owner’s needs and determine if they are the lease bit motivated.
Good luck…hope this helps…
Re: Clarification - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on January 15, 2003 at 15:45:18:
John W --(CA)--------------
Are you sure about your answer? As I understand it there is in general no ability to prorate. The proration rule is only for specific situations, such as a move for a change of job, death of a family member, sudden change in the health of a family member, and a sudden, unexpected even which requires a suddent move.
Good Investing********Ron Starr****************