Selling a house and waiting to buy again?

jane__nySeptember 25, 2008

I understand you have a year to reinvest the money from the sale of a house to purchase another to avoid being taxed.

Is there any way around this? We plan to sell our house and do not want to buy another in the same area. My husband wants to continue working another two years before retiring. We thought we'd rent for two years and then move to different state.

Is it mandatory to buy another home within a year of selling?

Any info would be appreciated,

Jane

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david_cary

I always thought it was 2 years. It is only if you made money on the sale of the house - and if you can show improvements that costs $$ - that is a deduction off of your capital gains.

You could alway buy something, somewhere with the proceeds and sell when you retire. Try to find something with low transaction costs and stable pricing.

    Bookmark   September 25, 2008 at 5:38AM
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dabunch

Check with your accountant, but it's my understanding that you, as a couple, could take 500k in a write off (not pay capital gains)every TWO years providing that you've lived in the house at least 2 years. You can continue doing this EVERY TWO years!

It's 500k for a couple & 250k for an individual.

That is the one good thing that this administration did. Before this you were able to take the write-off only once in your lifetime...

If your house is over 500k, you can take the 500k write-off, but you would have to pay capital gains on anything over that price if you don't buy (not sure the time)another house. Obviously, if your house is less than 500k, you could take the write-off & not have to purchase anything, ever.

    Bookmark   September 25, 2008 at 8:32AM
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kgsd

That is no longer true. You don't have to buy another property at all to avoid being taxed on your profit. You only have to live in the house 2 out of the last 5 years. See page 10 of the IRS publication regarding selling your home for more details and limits.

Here is a link that might be useful: http://www.irs.gov/pub/irs-pdf/p523.pdf

    Bookmark   September 25, 2008 at 9:06AM
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bozogardener

I believe you are thinking of a 1031 exchange, which applies to investment properties. If you have lived two of the last five years in your house, then what dabunch and kgsd said are accurate. Your house is different than a 1031 property.

    Bookmark   September 25, 2008 at 10:52AM
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arielitas_mom

The above posters are correct insofar as you do not have to purchase a new property in order to qualify for the exclusion of taxes on the sale of a primary residence ($250,000 per individual; $500,000 for married couple filing jointly) and that you are no longer limited to a one time exclusion. It's only on the sale of an *investment* property that you must purchase another *investment* property in order to *defer* (not preclude) capital gains tax. This is called a 1031 exchange. Sometimes, people later convert their investment properties into primary residences in order to then be able to exclude the capital gains taxes on the gain.

DaBunch - The current administration does NOT get the credit for this change...it was the Taxpayer Relief Act of 1997 (i.e., Clinton was still in office) that changed the law. It was enacted in May, 1997.

Here is a link that might be useful: tax relief act of 1997

    Bookmark   September 25, 2008 at 11:05AM
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carmen_grower_2007

As to all of these intricate tax rules, I say 'who is to know if you don't tell them?????'. Unless you are doing something else that is obviously illegal, they won't know unless you tell them.

Yes I know I will be flamed and I really don't care. The IRS is so convoluted that one hand doesn't know what the other is doing so why on earth follow any rules unless they are obvious ones.

    Bookmark   September 25, 2008 at 6:15PM
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dabunch

arielitas-
I stand corrected.
Time just flew by. I didn't think it was in effect that long.

carmen grower-
You won't get an argument from me ;)
I'm so tired of dumb & dumber running this country or making laws in Washington. These are not God's Laws, just made up by Congress. I probably didn't even vote for them...

This election I'm WRITING-IN "Hilary" (tried & true). You all can argue with me all you want, but I want the 1992-1999 financial era back! The thought of Obama or McCain running this country further into the ground seems like a reality. They are clueless...

    Bookmark   September 25, 2008 at 6:40PM
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jane__ny

Thank you all, but still confused. Bought our house 35 yrs ago for a whopping $70,000. Now its worth somewhere between 800-950,000, we just had a bank appraisal. We thought of renting for a few years until my husband decides to retire (own business). Don't want to stay in this area and don't want to buy here.

So if I'm understanding correctly, we can write off $500.000 and would have to pay taxes on anything we make above that? If we bought another property, we'd save on paying capital gains over $500.000?

We have probably put close to $200.000 into the house over the years, but would be hard to prove it.

    Bookmark   September 25, 2008 at 10:19PM
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housekeeping

It works out this way: (assume, say 900K sale)

$900 minus 6% realtor's commission ($54K) =$846

$846 minus any additional costs of sale, either mandatory inspections or your legal costs, preparing deed, etc. This varies, but let's just assume you have nothing in this category.

$846 minus your basis, i.e. purchase price, including any buyer's cost of sale, perhaps filling fees, but not, of course interest on your mortgage. In your case it's $846K minus $70K or $776

$776 minus any genuine capital improvements. These might be an addition, or another structure on the property. It would not be typical remodeling or fix up type things like painting, spiffed-up counter tops unless done solely for the purpose of selling, upgrading appliances, landscaping, etc.

Net amount of $776K minus eligible capital expenses is now further reduced by your $500k exclusion, so your total capital gains (that taxes would be paid on) would be $226K. Your capital gains rate is further refined by your income, though I am assuming that you probably wouldn't fall into an extremely low income level where you'd get a break on your capital gains.

Clearly if you have additional cost of sale expenses, and well-documented capital improvements then you can whittle down the net amount of the capital gains as a means of reducing your tax liability on the sale proceeds.

Another useful tactic that may be appropriate is the donation of environmental, conservation, open space, farm use or other type of easements to a willing and qualified land trust. This can have substantial tax planning (i.e. avoidance) benefits. These are complicated deals and only apply to special properties but they are a useful tool, and serve the public good by protecting land in perpetuity. OTOH, sometimes (and I speak from personal experience here), you can make such a donation and not reap any tax benefit, just the intense satisfaction of knowing the land is protected, forver.

One thing to keep in mind about the $500K cap gains exclusion is that if you have already carried forward sheltered capital gains (under the previous real estate tax scheme) by burying successive cap gains in higher cost housing, this will actually affect your basis, lowering it below what the apparent purchase price was of the property you are selling. This wouldn't affect the OP as far as I can tell from her posting.

As for why tell anyone? Well, you don't really have a choice because as part of your selling documentation the purchase price is automatically reported to the IRS. So, it wouldn't do to just forget about the sale when it came time to preparing that year's return.

With such large sums at stake you should consult with a skilled tax advisor, with experience in real estate transaction tax planning. I am neither an attorney, nor an accountant, but am only speaking from my own knowledge.

HTH,

Molly~

    Bookmark   September 26, 2008 at 12:55AM
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berniek

"Another useful tactic that may be appropriate is the donation of environmental, conservation, open space, farm use or other type of easements to a willing and qualified land trust. This can have substantial tax planning (i.e. avoidance) benefits. These are complicated deals and only apply to special properties but they are a useful tool, and serve the public good by protecting land in perpetuity. OTOH, sometimes (and I speak from personal experience here), you can make such a donation and not reap any tax benefit, just the intense satisfaction of knowing the land is protected, forver."

The land might be protected, but can also be useless to the heirs to use for their best benefit in the future.
I recommend that all angles be considered when changing the use/designation of land.

    Bookmark   September 26, 2008 at 1:55PM
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kgsd

Also, to reiterate: you do NOT have to purchase another property to take advantage of this exemption.

    Bookmark   September 26, 2008 at 2:08PM
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