 Juggling
two homes and capital gains taxes
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 Dear
Tax Talk,
I just bought a home and will be moving in this
month (August 2005). I'm also in contract for another new home due
for completion in February 2006.
I should be able to make some money selling the first
residence next February. Our household income is $180,000. If I
profit by about $100,000 from the sale of the first property, will
that increase our taxable income dramatically? I heard that by holding
the property for more than a year, I could classify the profit as
a long-term capital gain which is capped at 15-percent tax? Is that
right?
Thanks so much for your help. I really enjoy
reading your column. -- Janet
 Dear
Janet,
I enjoy answering your questions. If you can
hold out on selling the first home, you'll be saving quite a bit
on your taxes. It appears that you will not qualify for the traditional
home-sale exclusion of $500,000 for a married couple since you don't
meet the two-year use and ownership tests. In that case, you'll
end up including the gain from the home as capital gain income.
If you sell within a year, you'll pay short-term tax rates on the
gain.
The tax on short-term capital gains is the same that
applies to all your other income. With $180,000 in income, the gain
will be taxed around 33 percent plus state tax, depending on where
you live. If you hold out for the year (actually a year and a day),
your maximum rate will be 15 percent, plus your state tax. So if
you can rent out the property until you meet the one-year timeline
from the time you bought it, you'll be saving at least $18,000.
Even if you have to leave it empty, maybe the tax savings is enough
to cover your carrying costs. Be sure to check with your insurance
carrier, though, to make sure you can retain coverage while the
home is vacant.
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