Under the old rules, you could have deferred the gain by ‘rolling over’ into the next house, and then could take it tax-free (once, I believe) after age 65. Even then, I think you needed to keep buying ‘bigger’, or at least ‘more expensive’, not just reinvesting the ‘profit’ portion.
It’s my understanding that those rules went away with the new plan, so I think you need to wait the 2 years to pocket your gain.
Overall, I like the ‘new’ plan much better than the old one. If you have a way to buy undervalued properties, have the skill to fix them up, and the ability to move every 2 years, then you can make some nice tax-free profits.
I need some help figuring out if I can avoid paying any taxes on the profit from my current home if I’ve only been in it 18 months.
Here’s the story, I purchased a home in May 2001 and sold it in July 2004 and made approx $30k after everything was paid off. I built a new home, started construction in September 2003, and will be converting to permanent financing in at the end of this month July 2004. I would like to build a smaller house (smaller house = smaller utility bills & property tax) starting in September 2005, with that one being ready for occupancy, and needing to sell the house I’m in now, around April 2006. Which will have been 18 months in this house.
How does the rules apply to this situation?
I read someting about prorating the amount that is non-taxable, for example 18 months out of the minumum 24 month is 3/4. I’m single, so my max. non-tax is $250,000 x .75 would be $187,000. The anticipiated proceeds on this house are $65k. Will I need to pay taxes on this? or not since it is less than 187,000?
Or if the reason needs to be a job change or hardship, would unexpected high utilites and too high of property tax making the home unaffordable be a reason?
If your construction loan converts to permanent financing in Jul 2004, does that mean that your construction is completed and the home is ready to occupy? If so, then let’s start your occupancy on August 1, 2004. If you then sell this property anytime after August 1, 2006 you meet the two year ownership and occupancy requirements to exclude $250K of your profit from capital gains taxes.
Why the rush to sell on April 2006? Why not wait until August 2006 to settle and lock in your tax free profit? On the other hand, if you are selling so quickly, will you have a large enough profit to even worry about a capital gains tax at 15%?
There are hardship exceptions to the two year rules that allow you to prorate your exclusion, but your circumstances do not qualify. Having higher utility bills and property taxes than you wanted is hardly unexpected. Furthermore, the “unexpected” circumstances must create a hardship. Your situation does not seem to qualify.
Better to keep the property another six months as your primary residence.
Thanks for the reply, waiting the additional time to sell may be better.
Can I follow up here with another question regarding capital gains:
My house was appraised, and for simplicity, let’s say it seels for $290,000. My construction loan was for $225,000, but in addition to the loan, I put about $20,000 out of pocket into the home for matierals. I also acted as General Contractor as well as doing my own electrical, flooring and finish trim labor.
I guess after I think about this, it doesn’t seem fair that most if not all of my equity (profit) came from my own labor into the project, and then I have to pay taxes on this.
Where if a chose a builder to build a turnkey home, it would have appriased for what I purchased it for. And If I sold it for what I paid to build it, no captial gains due.
Yes, but if you bought a turnkey home & paid the builder, he would have paid taxes on his income from the work.
If you had paid yourself for your labor, you might also have avoided taxation on your home’s gain…but you would have paid income tax, social security, etc. at much higher rates than the capital gain rate.
The IRS doesn’t give much away, and the exclusion of gain on your personal home is one of the few ‘freebies’ - and it’s got fewer limitations than many tax-avoidance schemes. I agree that the easiest thing would be to wait out a few extra months and take the tax-free gain at 2 years.