CAPITAL GAIN TAX..Help!!

What is the name of your state? Virginia, Ok to the point, I bought a Condo in November 2004, it was my primary residence until March 2006(15 months or so) when I turned it over to a Real Estate company to rent because I had gotten married at this point and moved in with her because it was alot closer to both of our jobs. I want to sell because it is a hassle and have a buyer.

Purchase Price $131,000 Selling Price $180,000

Now that $49,000 profit margin I am being told is subject to Capital Gains Tax. I thought I could roll it over into my other home and avoid such a hit. I also thought Cap gains tax was set for houses valued over 200k. I need to know what I can do to avoid this or am I out of luck? Thanks in advance for any and all help.-Steve

A person has to owned and an lived in a residence for 2 of the last 5 years to be eligible for the sec 121 exclusion on capital gains on a personal residence. In some cases, a reduced maximal exclusion may apply. In your instance it would be a facts and circumstances test under the "unforseen circumstances" test. From your description, I don't think you qualify as marriage alone is not enough. For example, one couple were allowed a reduced exclusion with the facts of:

(4) A taxpayer married less than two years after purchasing a home that was located outside the school district of the taxpayer's step-children. Until the end of the school year, an older child was able to drive a younger child to school but after her graduation she was no longer able to provide transportation. The taxpayers then moved into a new home located in the children’s school district and rented out the first home, intending to return to it after the younger child graduated. However, the taxpayers sold the first home after they had another child and the first home was no longer large enough for their family. PLR 200601022.

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To get the exclusion you would need to argue you case is an unforeseen circumstance.

I don't know where you got the 200K figure and the rolling it over into another home ended a long time ago.

tranquility said:

A person has to owned and an lived in a residence for 2 of the last 5 years to be eligible for the sec 121 exclusion on capital gains on a personal residence. In some cases, a reduced maximal exclusion may apply. In your instance it would be a facts and circumstances test under the "unforseen circumstances" test. From your description, I don't think you qualify as marriage alone is not enough. For example, one couple were allowed a reduced exclusion with the facts of:

To get the exclusion you would need to argue you case is an unforeseen circumstance.

I don't know where you got the 200K figure and the rolling it over into another home ended a long time ago.

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Ok, thanks!...Who do I argue my case to? To the IRS via a lawyer? Thanks.

I mean this Uncle Sam is scamming everyone in this perdicament, say you sell a house as I mentioned above...$49k(possible profit) - agent fee $12k = $37k - Cap gains $12k = $25k - Misc. fees leaves you crap what a way to keep a workn' man workn.

You could move back in for 9 months before selling and avoid the tax.

htttrh said:

$49k(possible profit) - agent fee $12k = $37k - Cap gains $12k = $25k - Misc. fees leaves you crap what a way to keep a workn' man workn.

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I think you need to rework these figures. Long-term cap gains tax on $37,000 would be $1850 (5%) or $5550 (15%) depending on your tax bracket.

If, while you were renting out the property, you claimed depreciation deductions, your tax situation is somewhat more complicated.

And by the way, if you think that $25K is crap, you can always just send it to me...

Your first step would be to see a qualified tax professional to prepare your taxes. You can tell your situation to him and use his professional experience as applied to your facts to see. Frankly, you will need more than what you have said so far. Marriage is not an unforseen circumstance. If your work location has not moved, it is not an unforseen circumstance.

htttrh said:

Ok, thanks!...Who do I argue my case to? To the IRS via a lawyer? Thanks.

I mean this Uncle Sam is scamming everyone in this perdicament, say you sell a house as I mentioned above...$49k(possible profit) - agent fee $12k = $37k - Cap gains $12k = $25k - Misc. fees leaves you crap what a way to keep a workn' man workn.

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As someone else already said...where do you get 12k in capital gains tax?

LdiJ said:

As someone else already said...where do you get 12k in capital gains tax?

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Yeah, first off the "misc fees" probably also reduce the gain. Since you held the property for over a year, the federal rate is 15% plus the 5.75% for the commonwealth is less than 8K.

I think I was told I was in the 25% tax bracket? What info do you need to determine that? I have an appt with a tax lawyer but its a few weeks off. I would like to know what Iam up against. I dont like owing money on anything except a home so I would like to pay this debt to our beloved govt right now. Thanks for everyones help

htttrh said:

I think I was told I was in the 25% tax bracket? What info do you need to determine that?

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Long-term (assets held more than one year) capital gains tax rates are lower than regular tax rates. Spend some time exploring the www.irs.gov website. Type "capital gains" into the SEARCH box.

It is a really helpful site full of info. Check out the "Publications" section.

CAOwner

I'm about to sell a home, and have a similar question on capital gains tax avoidance...

tranquility said:

A person has to owned and an lived in a residence for 2 of the last 5 years to be eligible for the sec 121 exclusion on capital gains on a personal residence.

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I have a realtor telling me that an owner must have lived in a home the last 2 years of the last 5 years of ownership in order to avoid capital gains tax. I have a buddy telling me that an owner must have lived in the home any 2 of the last 5 years to get out of capital gains. I hope my buddy is right, because for the past ~2.5 years I have not been living in the home, and in fact it was a rental property for part of that time. So the question is, if I lived in the home for the first 2 years of the last 5 years, am I off the hook?

tranquility said:

I don't know where you got the 200K figure and the rolling it over into another home ended a long time ago.

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That's interesting. I'm just learning about this now; as folks are telling me if I cannot avoid capital gains tax by the 2/5 yr rule above, that I can quickly reinvest in another property to avoid the tax. One person is telling me I have 60 days to re-buy, and someone else (a realtor) is telling me I would have 2 years to buy the next home. I'm not saying you're wrong.. I'm just pointing out that there is a lot of inconsistent info out there on this.

I applaud you using the search function, but someone is going to yell at you for "hijacking" a thread.

Still, you must have owned and lived-in the property for 2 of the last 5 years. You do not have to have lived in the property the *last* years to count. (Sec. 121)

However, since you rented the property out, it is now also an income property. You can exchange the property for "like kind" property and delay the payment of taxes on your gain. (Sec. 1031) There are rules to this and you need to see a qualified accomodater to accomplish this so I won't go into them. This is where everyone can be right. You cannot exchange into a personal residence as it would not be like-kind.

As to the Realtor advice, my grandfather once told me to never ask a barber if you need a haircut.

tranquility said:

I applaud you using the search function, but someone is going to yell at you for "hijacking" a thread.

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I figured the OP was done with the thread by now, and so I organized my similar question in here to avoid the overall forum clutter of similar threads - just trying to nail the same issue solidly home for the next reader, all in one place.

tranquility said:

Still, you must have owned and lived-in the property for 2 of the last 5 years. You do not have to have lived in the property the *last* years to count. (Sec. 121)

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Now that I've read publication 523 (http://www.irs.gov/publications/p523/index.html), I agree. The examples make it clear that the realtor misinformed me.

tranquility said:

However, since you rented the property out, it is now also an income property. You can exchange the property for "like kind" property and delay the payment of taxes on your gain. (Sec. 1031)

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I really want to avoid a section 1031 exchange, as well as the tax. I found this example in publication 523, which leads me to think that I can simply pocket all my gains, and pay no tax:

IRS Publication 523 excerpt said:

Example 2.

William owned and used a house as his main home from 2000 through 2003. On January 1, 2004, he moved to another state. He rented his house from that date until April 30, 2006, when he sold it. During the 5-year period ending on the date of sale (May 1, 2001 - April 30, 2006), William owned and lived in the house for 32 months (more than 2 years). He must report the sale on Form 4797. He can exclude gain up to $250,000. However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next.

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I've claimed repair expenses, but not depreciation, so that appears to simplify my situation. Am I missing something? Am I going to be taxed in one way and not another? Are you saying that the gain on the sale of my home is considered income tax, not capital gains?

htttrh said:

What is the name of your state? Virginia, Ok to the point, I bought a Condo in November 2004, it was my primary residence until March 2006(15 months or so) when I turned it over to a Real Estate company to rent because I had gotten married at this point and moved in with her because it was alot closer to both of our jobs. I want to sell because it is a hassle and have a buyer.

Purchase Price $131,000 Selling Price $180,000

Now that $49,000 profit margin I am being told is subject to Capital Gains Tax. I thought I could roll it over into my other home and avoid such a hit. I also thought Cap gains tax was set for houses valued over 200k. I need to know what I can do to avoid this or am I out of luck? Thanks in advance for any and all help.-Steve

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Well...you thought wrong.

Here is your problem, it was not your primary residence for two of the last 5 years. It was only your primary residence for about 15 months. Now, since your move was due to a marriage, you might qualify for a pro-rated exclusion. See a local tax professional.

This is why hijacking a thread is discouraged -- now we have 2 fact scenarios out there & the answers are radically different! BTW, tax issues are never "solidly nailed" since the answer to just about any tax question is, "It depends." (The remaining questions can be answered with, "Because Congress said so.")


jgombos: your realtors & friends are all clueless. Do not ask them any more tax questions.

You can exclude up to $250,000 of capital gains upon sale. HOWEVER, the tax code requires you to recapture any depreciation that was allowed or allowable. Since you COULD have claimed depreciation over the last 2.5 years, you'll have to recapture it even though you didn't claim it in the first place.

All is not lost: take your last 3 years' returns to a tax pro & amend them to claim the depreciation. Depending on your tax bracket, you might want to elect ADS 40 year depreciation instead of the usual 27.5 year MACRS depreciation. And thank your lucky stars you don't have to research catch-up depreciation.....

You could do a 1031 exchange, but you'd have to purchase a new rental house because you cannot do a 1031 exchange with personal use property. You're selling because you don't like being a landlord, so what have you gained? Also, if you do a 1031 exchange, you lose the primary residence exclusion of $250,000 capital gains in 6 months....