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Avoiding tax on home-sale profits

George SaenzDear Tax Talk,
I am selling my primary residence that I have owned for 17 months. I bought it for $295,000 and am selling it for $373,000 minus $22,000 in real estate commission. I put approximately $16,000 worth of improvements into the house and have all my receipts. I am rolling over my profit directly into a $450,000 home. Am I responsible for capital gains tax here? I thought as long as you were rolling it over into another property of equal or greater value, you could defer this tax? Would you clear this up for me? I currently file as a single taxpayer in the 25 percent tax bracket. Thanks for any info you could give me. -- Marie

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Dear Marie,
The way things used to work aren't how things work nowadays. Congress scrapped the old rule that required you to reinvest the proceeds of the sale of your home in a new, more-expensive property in order to avoid taxes. The new rules don't turn on whether you reinvest or not.

Instead, the new rules require that you own and live in your home for a period of two years within the five years preceding its sale. If you meet the ownership-and-use test, you don't have to buy a new home and you can exclude up to $250,000 in gain, or $500,000 in the case of a married couple that files a joint return.

In your case, unless the sale is motivated by special reasons, you would not be able to exclude from income the $40,000 in gain ($373,000 minus the $22,000 commission minus $16,000 in improvements minus $295,000 cost). Since you held the property for more than one year, you would pay long-term capital gains tax of 15 percent or $6,000 in tax.

If you sell because of special reasons then you would get a partial exclusion. Special reasons would be:

1. Job-related move
2. Health-related move, or
3. Unforeseen circumstances

The partial exclusion is the $250,000 (or $500,000) maximum exclusion multiplied by a fraction, the numerator of which is the number of months you met the ownership-and-use test and the denominator of which is 24 (the number of months in two years). In your case, if the sale was motivated by these special reasons, the available partial exclusion would be sufficient to eliminate your gain.

 
-- Posted: Aug. 19, 2004
   

 

 
 

 

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