I have a tax question...capital gains.

[AllyandJack]

A friend of mine bought a house with a girl he now hates. He wants to sell the house. He hasn't lived there for 2 years.

Someone told him if he uses the money to buy another piece of property, he won't have to pay the capital gains tax on any money above the original sale price. I see nothing on irs.gov about this as it relates to residential property, only for investment properties (exchanges).

Any input?

 

[Galahad]

A friend of mine bought a house with a girl he now hates. He wants to sell the house. He hasn't lived there for 2 years.

Someone told him if he uses the money to buy another piece of property, he won't have to pay the capital gains tax on any money above the original sale price. I see nothing on irs.gov about this as it relates to residential property, only for investment properties (exchanges).

Any input?

I believe you only get to do this once though.

 

[chrissyk]

Are you referring to the 1031 exchange? If so, I believe that the existing property has to be an investment, and the new property also has to be the same kind of investment.

 

[mtblujeans]

We just talked to an accountant about this very thing. We are soon going to be selling our first house that we have been renting out. We have not lived in it for 5 years.

The capitol gains is in reference to the profit you make from the sale of the property. If you want to exchange the property for a like property, you go through a special broker, selling the property to that special broker, and then buying the exchange property through that special broker, paying them a fee. No cash/money can be used in this type of exchange. I really don't understand the exchange transaction all that well. Plus, if his property is owned by a 'partner' an exchange probably won't work for them.

It sounds as though the capitol gains tax is 15% of the profit of the sale of the property. He said he thought that was going to be going down in the near future. He was going to go to a workshop last week for update tax info and he was going to get back to us.

 

[LoraJ]

I believe since he is single, he would be able to drop it in another property up to $250,000. Anything above that he would be taxed. But, I do think you have to have the proerty for at least 2 years.

I know Bush is trying to change this now though so that there is no more shelter, not sure if it will go through.

 

[mtblujeans]

I think you have to have lived in it for 2 years.....

 

[Galahad]

I know Bush is trying to change this now though so that there is no more shelter, not sure if it will go through.

To be fair, a tax advisory panel has recommended lowering tax rates and eliminating many of these kinds of shelters, including the mortgage deduction. I don't think it is fair to say the administration is "trying to change this".

Here's how it is suppose to work:

Making Home Sale Capital Gains Disappear

By Roy Lewis (TMF Taxes)

I've always been enthralled with magic. Sleight of hand... illusion... call it what you will. But when these artists step on stage and make a dove, a rabbit, or even the Statue of Liberty disappear, I'm just completely amazed and astounded. I've always wanted to be able to do something like that myself. And now I can. And you can too.

With the right knowledge, information, and patience, you can make the taxable gain from the sale of a rental property or a vacation home completely disappear -- stick the gain in your pocket and thumb your nose at Uncle Sammy. Poof... gone.

How? Simply convert the property to a primary residence, use it as such for the appropriate period of time, and then sell it for a tax-free gain. Simple as that. Well, it's a bit more complicated, but you can read more about the rules for tax-free treatment on the gain of a principal residence in my series of articles entitled Home Sale Exclusions in the Taxes FAQ area. You'll also want to read more about the rules regarding the home sale gain exclusion in IRS Publication 523 to make sure that you've got all your bases covered. If done correctly, there are some large tax-saving opportunities out there.



How It Works
The key to the entire plan is that you are allowed to sell a principal residence once every two years and exclude up to $250,000 ($500,000 for a married couple) of the gain on the sale. Many of you may be under the mistaken impression that the home sale exclusion is still only "once in a lifetime," or only available to those of a certain age (such as the elderly), or only available if you buy a more expensive home. Those were the old rules, and they no longer apply. If you meet the two-year ownership and use tests for a principal residence, and don't sell more than one principal residence in any two-year period, you can exclude any capital gain tax on the sale (up to the $250,000 or $500,000 limits mentioned earlier). So, to get the maximum bang for your buck, you'll want to understand the rules and have the patience to wait out the two-year residence period. For those of you with substantially appreciated real estate in the form of investment properties or second homes, the tax savings could be worth the wait. Let's look at a few examples.

 

[mtblujeans]

"The key to the entire plan is that you are allowed to sell a principal residence" It doesn't sound like he is living there. We are in that situation, too. We are looking to sell a house we do not live in. The Advisor said the only way for us to get around the capitol gains for that house would be to move back into it and then sell it in two years.

 

[Chicago526]

I always thought that if you are selling the house/condo you are living in and using the profit to buy a new home, you are not taxed on it period. If you take any or all of that profit and NOT use it to buy a house, you STILL don't pay taxes as long as you don't do this more than once every two years.

Am I wrong?

 

[mtblujeans]

The "key" is if it is your principle residence...that makes a difference.

 

[AllyandJack]

Well, I'm glad I'm not the only one confused by it! He does live in the house with the girl he doesn't like anymore (I know...I told him before he did this not to do this).

I know you can take the $250,000 or $500,000 exemption as many times as you want as long as you don't do it within 2 years. I know you have to live in it for 2 out of 5 years.

But, I see nothing about selling a residence and avoiding the taxes by putting the money back into another property. I know there are such rules for investment properties.

Right now, they're trying to just sell it for their purchase price so they don't have a "gain" at all. He wants out, so he's happy just getting back his initial investment.

I get the feeling the government doesn't really want us to know how to avoid the tax and that's why they're so vague about it all.

Thanks, guys!

 

[brerrabbit]

The Tax law changed about five or six years ago. Back then if it was your principle residence you could take a one per lifetime exemption from the capital gain tax. It was originally designed to let retirees take their money out of their house. Otherwise you had to reinvest all the gain into a new house to avoid taxes. The new law allows a gain on the sale of your primary residence and you can take that gain up to every two years. In other words you are suppose to live there for two years before your proceeds from the sale are tax free. There are exemptions that would allow for the early sale while m,aintaining the exemption. If you are required to move for work you can still get the exemption. The breakup of a marraige might also be included but I don't know about the breakup of a relationship.

 

[mtblujeans]

...I get the feeling the government doesn't really want us to know how to avoid the tax and that's why they're so vague about it all.

Thanks, guys!

That's exactly what the tax advisor told us! He said they make it vague so they can argue one way or another if you are borderline on a deduction. He said he feels that goes both ways....people can argue one way or another when being audited, too....when it is so vague!

 

[puffkin]

As long as it is your principle residence for 2 of the last 5 years (so basically 2 years) you don't have to pay capital gains tax on the gain. I believe it is up to $250,000 gain for single, $500,000 married.

If the current tax laws do not change, you can do this everytime you sell your principle residence, as long as you meet the 2 year requirement and your gain isn't over the limits.