Noah Rosenblatt brings up a timely article (timely for me anyway) on the tax benefits associated with selling a primary residence. Here’s the pertinent info:
To claim the maximum exclusion on the capitol gains on the sale of your home, you MUST first meet the Ownership and Use tests…
- Owned the home for at least 2 years (the ownership test), and
- Lived in the home as your main home for at least 2 years (the use test)
The general idea is that a single person can exclude $250K in capital gains while a married couple filing joint taxes can exclude $500K provided they meet some basic conditions and the meet the two tests above. (Noah includes the conditions on his post!)
Now for my question, is there a timeframe that someone needs to plow this money back into a new residential property in order to reap the capital gains benefits?
Since Noah doesn’t mention this, I’m assuming that the idea of reinvesting within a certain timeframe only applies to investment properties, but I’d sure like to be more confident of this assumption and (horror of horrors) I’d rather not try to read the tax code!
Dustin
No requirement to reinvest, EVER!
Happy Days!
Russ
Yep, I second Russ’s answer (of course he’d know, he’s a RE lawyer) since I have actually used that rule myself. The only thing that really BUGS ME is that I’m single and only get the $250,000. Now wait a minute there! I have to pay for the whole house myself, do all the work myself, have only one income to support the property and I get half the benefit???? What’s wrong with this picture????
A bit more information about that rule. You have to have lived in the house 2 of the last 5 years TO THE DAY. It can’t be 5 years and one day. I’d lived in my house for two years, then somewhere else for 2 1/2 years. I still got the exemption even though I hadn’t lived in the house for over 2 1/2 years.
Many people have used this rule combined with 1031 exchanges. Use a 1031 exchange from one investment property to another and rent it for a few years. Then move into it for at least two years then sell and pocket all the money from the prior exchange AND appreciation since you used it as a primary residence. Rules may be tightening as to how long you have to live in it to get the prim. res. exemption. I think I’ve heard it may be up to five years now? Russ? what do you know on this?
I feel the same way…sounds discriminatory to me! I have worked my butt off to keep this place afloat…I can’t imagine how we have allowed this to fly…It should be $500,000 for everyone!
Thanks Russ and Leslie,
I was hoping that was the case!
Thanks Russ and Leslie,
I was hoping that was the case!
Can someone confirm that there’s a “hardship exemption” where the gain is prorated if you’ve lived in the house for less than 2 years if you are a. relocating for a job or b. have an illness or other “unforseen issue”?
There is a hardship provision, but it is not too lenient. I would check with an accountant on that one. Not always available for an “elective” job change vs. a “forced” job change. Havent’ seen it applied for other reasons like an illness, but that doesn’t mean it’s not possible. But I’m pretty sure it’s hard to “fake” it.
Sorry for the delayed comment.
Yes, agreed with Russ & Leslie too! The 2 out of 5 years primary residence tax exclusion has no timeframe whatsoever to reinvest, and as
Leslie points out, the other tax benefit (1031 Exchange) is more for those speculative investors, flippers out there who do NOT meet the primary residence requirements, but can still DEFER PAYMENT ON TAXES as long as you SHOW INTENT TO BUY within 180 days of closing (can someone please confirm this timeline?).
Not sure about the hardship provision.
Sorry for the delayed comment.
Yes, agreed with Russ & Leslie too! The 2 out of 5 years primary residence tax exclusion has no timeframe whatsoever to reinvest, and as
Leslie points out, the other tax benefit (1031 Exchange) is more for those speculative investors, flippers out there who do NOT meet the primary residence requirements, but can still DEFER PAYMENT ON TAXES as long as you SHOW INTENT TO BUY within 180 days of closing (can someone please confirm this timeline?).
Not sure about the hardship provision.
The timeframes for the 1031 are as follows:
45 days – Time to identify potential replacement property after the benefits and burdens of the relinquished property (property you are selling) have been transfered to the new owner (usually at closing)
180 days or until your tax filing due date (whichever is less) – to close and take title to any or all identified property
These rules are hard and fast and many related rules apply as well.
One thing to keep in mind is this…as per a new ruling by the IRS…if your principal residence was a replacement property in a 1031 exchange, you must now hold that residence for 5 years before you are able to take affect of section 121 exclusion!
What proves residency? Is it tax filing address? Does one also have all other records changed, such as driver’s license? Example is I own an apartment in NYC. I changed my address to my country house address, as I will retire, even though I currently still work in NYC and still live in my apartment there 5 days per week. I also now serve jury duty at my country address, have my license addressed in the country etc. It turns out I will not sell my apartment as soon as expected, and will have to change my residency back to NYC for a year, or so, to meet the residency requirement. As long as my employment address, and tax filing address are NYC will I be OK for the exclusion?
Thanks
Mark,
I’m not sure of the answer for you… I imagine a tax accountant and/or lawyer would be the best place to get that kind of info.
Mark,
I’m not sure of the answer for you… I imagine a tax accountant and/or lawyer would be the best place to get that kind of info.
i want to sell my home to buy another bigger home can i sell it before the 2 years ie 1 year 6 months if i reinvest in primary residence and not pay capital gains?
i want to sell my home to buy another bigger home can i sell it before the 2 years if i reinvest in a primary residence and not pay capital gains?
Edwin and Vic,
The short answer is no. That’s an old rule that went out about ten years ago, as I recall. Bigger home has nothing to do with capital gain taxes anymore. Consult an accountant, but I believe the general rule is still “must have lived there 2 of the last 5 years”. As with anything in life, there are exceptions.
What constitutes a sale? Here is my problem.
I moved to a new house 2 years ago. My son moved in to my old house and is renting if from me. He now wants to buy it. I need to sell by May of 2009 or pay the taxes. He will not be financially ready to purchase it that soon. Can I deed it to him on paper and record the sale before my deadline, have him make my payments on a wrap, have a contract of sale with him until he can afford to get new financing. I can see some potential flaws with my idea, but would like some advice doing this properly. I do not want to boot him out in a year, but I certainly do not want to pay all the taxes either.
My fiancee sold her interest in a house to the co-owner, who refinanced and bought her out. She meets the ownership and use requirements, having lived in the house for 4 years. She realized about a $50,000 gain over her investment.
What period of time does she have to reinvest in another residence to avoid paying capital gains tax?
Can she avoid capital gains taxes in any other way?
My fiancee sold her interest in a house to the co-owner, who refinanced and bought her out. She meets the ownership and use requirements, having lived in the house for 4 years. She realized about a $50,000 gain over her investment.
What period of time does she have to reinvest in another residence to avoid paying capital gains tax?
Can she avoid capital gains taxes in any other way?
Hello,
Due to State Department back-to-back overseas assignments we have only managed to live in our house 17 months in 10 years (10 years expires 09/09). Our tenants are moving out and we want to sell it. Can we prorate the time spent there? Or could the hardship provision be used – we didn’t elect to stay overseas we were assigned.
Thanks,
John