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Tax Talk with George Saenz

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Taxes on second home sales

Dear Tax Talk:
Do you have to hold on to a second home for two years to roll over capital gains? Secondly, do you have to be age 55 to take your one-time deduction of $500,000 from capital gains on your primary residence? What is the correct amount for married and for single home sellers?

Dear Benson:
A second home does not qualify for rollover (actually a permanent exclusion from income under current law) of capital gains. The exclusion only applies to your primary home, so the amount of time you hold the second home is irrelevant since you have to pay tax on any gain.

An exception to this would be if you occupy the second home as your primary home for a period of two years. You could then sell the second home and qualify for the exclusion. The age 55 rule also went with the change in the rollover of capital gains rule. Everyone at any age qualifies for the current $250,000 capital gains exclusion on the sale of their primary home -- provided they owned and lived in the home for two of the last five years. In the case of a married couple filing a joint return, the exclusion is $500,000.

IRA and home purchase rules

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Dear Tax Talk:
My wife and I have a traditional individual retirement account. We bought a home, and the closing was done 12 days ago. As per Internal Revenue Service definition, we are first-time home buyers. We still have some money left with us after the closing. Now, can we withdraw money from our IRA penalty-free as first-time home buyers? The question here is, the closing is done, we didn't need money from the IRA to buy the home, and also we don't have any more settlement costs. Can we withdraw the IRA penalty-free now? We would like to have some more money with us, so that's why we're thinking of withdrawing IRA money. Please advise. We would appreciate you help.
Thank you.

Dear Kishor:
You can withdraw up to $10,000 from an IRA penalty-free for the qualified acquisition costs of a residence of a first-time home buyer. A first-time home buyer is basically anyone who did not own a principal within the last two years. You have up to 120 days following the withdrawal to use the money for qualified acquisition costs. Qualified acquisition costs are the costs of acquiring, constructing or reconstructing a residence.

Since you didn't withdraw the money prior to closing, a subsequent withdrawal will not be considered as used for qualified acquisition costs.

-- Posted: June 15, 2001

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