Real Estate Tax Question

[rogercbryan]

Real Estate Tax Question

I’m going to call my CPA on this but I was wondering if anyone can help me to look like less of an idiot when I call him.

I just sold my house in OH 5-29-08. I made about $12,000 on the sale. I owned the house for a little less than two years so I know I’m going to get hit with hefty taxes… unless???

I purchased a condo in DC 3-29-08. I had originally wanted to sell my house and then buy the condo… but the market had other ideas.

Could I avoid the heavy taxes if I was to take all $12,000 and put a payment on my new place? I’ve talked to a few different people who have told me that the escrow agent would have to send the money directly to my current lender to avoid the taxes.

I’m new to all this… so any advice on how I could avoid the taxes legally would be greatly appreciated.

[entrepresooner]

It's called a 1031 exchange. I'm not sure on this, but I think you may have to have set it up before you sold the property. You can't have had access to the money since the sale, that's why you need an escrow.

[JLeezer]

Was the house your primary, legal residence? If so, you may be exempt from any taxes on a gain of up to $250,000 (prorated down for the portion of the 2 years of which it was your primary residence). I'll look into it more and give a better explanation if it was in fact your primary residence. Let's hope it was and it works out for you.

[warrensway]

1031 exchanges cannot happen if you have lived in the property and not used it as a 'investment' I just took a CE class on 1031s on saturday. You can however prorate your tax on the house so your taxes will not be that bad. However, you will be hit with some.

[JLeezer]

Ok, I'm going to assume that your answer will be that it was your primary residence and that you moved for the purpose of a job (doesn't much matter if it was you that created the job for which you moved).

You will not need to pay taxes on the gain (up to $250k if single, or $500k if married--or a prorated portion of these amounts if you lived in the house for less than 2 years). So, if you lived in it for 18 months, you'd be able to not pay any capital gains tax on a gain of $187,500 if single or $375,000 if married.

Here are a few resources as reference:
Clarifying Irs Primary Residence Tax Exemtion - Real Estate Advice
Primary Residence Sales

A very reputable tax information source, CCH:
CCH Financial Planning Toolkit | Selling Your Home

[rogercbryan]

Ok, I'm going to assume that your answer will be that it was your primary residence and that you moved for the purpose of a job (doesn't much matter if it was you that created the job for which you moved).

You will not need to pay taxes on the gain (up to $250k if single, or $500k if married--or a prorated portion of these amounts if you lived in the house for less than 2 years). So, if you lived in it for 18 months, you'd be able to not pay any capital gains tax on a gain of $187,500 if single or $375,000 if married.

Here are a few resources as reference:
Clarifying Irs Primary Residence Tax Exemtion - Real Estate Advice
Primary Residence Sales

A very reputable tax information source, CCH:
CCH Financial Planning Toolkit | Selling Your Home

I don't know if I can get away with this one. I would have to consider that at no time while I owned the property in OH did I pay any OH state taxes. It would be impossible for me to say that I was a resident of the state of OH. I bought the house 2 years after I moved out of the state. When I purchased the home I thought I was moving back but then never did.

The information you have provided is excellent by the way.

[rogercbryan]

1031 exchanges cannot happen if you have lived in the property and not used it as a 'investment' I just took a CE class on 1031s on saturday. You can however prorate your tax on the house so your taxes will not be that bad. However, you will be hit with some.

I'm confused here... so if the property was an investment and I never lived there then I can roll my profits into the new home? I've reread your post a few times and I don't know if I'm reading it clearly.

[jasaunders]

I'm confused here... so if the property was an investment and I never lived there then I can roll my profits into the new home? I've reread your post a few times and I don't know if I'm reading it clearly.

Yes, investment properties can use what's known as a 1031 Exchange, which is a way to defer taxes by rolling the capital gains into another property within a set time frame. But like he said, it couldn't have been your primary residence, and there are strict rules governing 1031 exchanges. And while they do offer some benefit, they simply defer taxes, not eliminate them, because eventually you will have a capital gains somewhere down the line.

[BusinessAdviser]

Ok, I'm going to assume that your answer will be that it was your primary residence and that you moved for the purpose of a job (doesn't much matter if it was you that created the job for which you moved).

You will not need to pay taxes on the gain (up to $250k if single, or $500k if married--or a prorated portion of these amounts if you lived in the house for less than 2 years). So, if you lived in it for 18 months, you'd be able to not pay any capital gains tax on a gain of $187,500 if single or $375,000 if married.

Here are a few resources as reference:
Clarifying Irs Primary Residence Tax Exemtion - Real Estate Advice
Primary Residence Sales

A very reputable tax information source, CCH:
CCH Financial Planning Toolkit | Selling Your Home

Please correct me if I'm wrong, but I believe that the info provided above is incorrect. Unless I am wrong, I believe that you must live in a residence for at least two years, not "less than two years," to be able to realize the tax advantage on capital gains.

[rogercbryan]

Yes, investment properties can use what's known as a 1031 Exchange, which is a way to defer taxes by rolling the capital gains into another property within a set time frame. But like he said, it couldn't have been your primary residence, and there are strict rules governing 1031 exchanges. And while they do offer some benefit, they simply defer taxes, not eliminate them, because eventually you will have a capital gains somewhere down the line.

This is what I'm looking for. The property was an investment property. So does anyone know the time frame to roll this over into the new property in order to defer the taxes. Would I be right in assuming those taxes would be deferred until I sell the new property (hopefully some day for a profit)? Do I need to keep any special type of documentation in order to make this legit on my tax returns next year?

I'm figuring that I can show the exact amount of the wire transfer from the escrow company and then show a check for the same amount written to my new mortgage company with in a few days should suffice.

When I call my CPA I'm going to get charged $150 to get his advice. I'd like to avoid doing that until I prepare my personal taxes. Thank you all for your help!

[rogercbryan]

1031 exchanges cannot happen if you have lived in the property and not used it as a 'investment' I just took a CE class on 1031s on saturday. You can however prorate your tax on the house so your taxes will not be that bad. However, you will be hit with some.

Thank You! This 1031 exchange is what I was looking for... I'll read up a bit more on this.

[JLeezer]

Please correct me if I'm wrong, but I believe that the info provided above is incorrect. Unless I am wrong, I believe that you must live in a residence for at least two years, not "less than two years," to be able to realize the tax advantage on capital gains.

According to the most recent tax code that I can find on the subject, you can prorate the tax free capital gains based on the portion of the 2 years in which it was a primary residence. The only other time-related restriction I have found is regarding that the time property was a primary residence must have been within the past 5 years.

Please, though, if you have sources contrary to what I've provided, I would like to see them so as to not provide inaccurate advice nor take that advice myself.


Of course, all of this is a mute point for Roger's situation, as the property was never a primary residence. If only he had lived in the property for 36 days he could have avoided taxes on the gain.

[BusinessAdviser]

According to the most recent tax code that I can find on the subject, you can prorate the tax free capital gains based on the portion of the 2 years in which it was a primary residence. The only other time-related restriction I have found is regarding that the time property was a primary residence must have been within the past 5 years.

Please, though, if you have sources contrary to what I've provided, I would like to see them so as to not provide inaccurate advice nor take that advice myself.


Of course, all of this is a mute point for Roger's situation, as the property was never a primary residence. If only he had lived in the property for 36 days he could have avoided taxes on the gain.

From IRS.gov:

I use my home for business. Can I deduct the expenses?

To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited.

Your use of the business part of your home must be:

Exclusive (see *exceptions below),
Regular,
For your trade or business, AND

The business part of your home must be one of the following:

Your principal place of business,
A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
A separate structure (not attached to your home) you use in connection with your trade or business.

Basically, you cannot deduct your entire rent unless your entire property meets the requirements above. If, for example, you only use one room, you can figure the square footage and deduct the percentage of rent that corresponds to the room's percentage of the house, provided the room meets the requirements above. There are also similar rules regarding individual items, such as a television, phone, etc., which allow you to deduct them, provided they are used exclusively for business, not both business and personal.

[JLeezer]

From IRS.gov:

I use my home for business. Can I deduct the expenses?

To deduct expenses related to the business use of part of your home, you must meet specific requirements. Even then, your deduction may be limited.

Your use of the business part of your home must be:

Exclusive (see *exceptions below),
Regular,
For your trade or business, AND

The business part of your home must be one of the following:

Your principal place of business,
A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or
A separate structure (not attached to your home) you use in connection with your trade or business.

Basically, you cannot deduct your entire rent unless your entire property meets the requirements above. If, for example, you only use one room, you can figure the square footage and deduct the percentage of rent that corresponds to the room's percentage of the house, provided the room meets the requirements above. There are also similar rules regarding individual items, such as a television, phone, etc., which allow you to deduct them, provided they are used exclusively for business, not both business and personal.

I'm confused. I thought your question about the accuracy of what I had posted was regarding the issue of tax-free capital gains on the sale of a primary residence (which wasn't the case of Roger, found out after the fact) but you've provided support for a deduction for home office usage. Which one are we talking about here? I agree completely with what you've posted, but we've crossed into a completely different discussion (capital gains on the sale of primary residence vs. tax deduction for a home office).

Quality links on CCH's site:
CCH Financial Planning Toolkit | Selling Your Home
which leads to
CCH Financial Planning Toolkit | Two Years of Ownership and Use
which leads to
CCH Financial Planning Toolkit | Reduced Exclusion
which states:

You might qualify for a partial exclusion of gain on the sale of your home even if you don't meet the two-year rules, if the reason that you can't meet them is because you suffered a "change in place of employment, health, or unforeseen circumstances."

One more from Publication 523 (2007), Selling Your Home

[Gaulkin]

Was the house your primary, legal residence? If so, you may be exempt from any taxes on a gain of up to $250,000 (prorated down for the portion of the 2 years of which it was your primary residence). I'll look into it more and give a better explanation if it was in fact your primary residence. Let's hope it was and it works out for you.

It has to be 2 or more years as your residence. A 1031 wouldnt work since you already sold the property. Your going to be taxed no matter how you cut it. Next time wait the whole two years.