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Capital Gains Question

Old 03-20-2009, 04:56 PM
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Hi folks, As a side hobby I like to do a little light construction. I built my first house when I was 21 small 1200 sq ft. I lived there for 5 years sold and built again. This time 5,000 sq ft but only heat 3,100. I have lived here for a little over a year and want to sell and build again. I'm told I have to stay here 2 yrs total not to pay capital gains tax as you can not sell more than 2 houses in 5 yrs. Is that right or can anyone shoot me straight? Also if I can sell the house in this economy, is the capital gains tax % very high? I was thinking it may be worth paying if I have a very interested buyer. I'm in NC, thanks in advance for any advice.
Old 03-20-2009, 05:19 PM
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Married couple is tax exempt on 500k gain on principle residence if lived in for 2 out of 5 years. Single is tax exempt on 250k on principle residence if lived in for 2 out of 5 years.
That's my understanding of it....
You may be wise to stay another year if your going to realize a gain.....
Old 03-20-2009, 05:24 PM
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If you are considering your house to be your principal residence, you generally have to live in it for two (2) years before selling to be eligible for the $250,000/$500,000 gain exclusion noted by bobb. The long-term capital gains tax, for Federal purposes, is 15% when you hold the property for more than 12 months before selling. So, you would probably qualify for the Federal long-term capital gain rate since you have lived in the current house for more than one (1) year. As noted, this is the Federal rate, you would also have some tax at the state level so the rate on the gain will be more than 15%, I would think.
Old 03-20-2009, 05:31 PM
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Thanks fellows
Old 03-21-2009, 07:12 PM
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If you built it a year or so ago and have some basis for valuing it at that time, there isn't much chance of selling it at a gain in this economy. You may even be able to claim a capital loss
Old 03-22-2009, 06:23 AM
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Tarheel - If it is your principle residence you may qualify for a partial exclusion. Here is some info to get you started. "Unforeseen circumstances" is a pretty broad term and in my practice we have used it for some unusual reasons.


...Fortunately, a reduced exclusion is available if the reason for the sale is a change in place of employment, health, or other unforeseen circumstances where the taxpayer fails to meet the two-year ownership and use requirements or has already used the exclusion for a sale of a principal residence in the past two years. If you qualify for the reduced exclusion, the amount of the reduced exclusion equals a fraction of the $250,000/$500,000 dollar limitation. The fraction is based on the portion of the two-year period in which the seller/taxpayer satisfies the ownership and use requirements. For example, if you have owned and used your home for one year, a single individual's exclusion would be $125,000 ($250,000 for certain joint filers).
In each category that qualifies for the reduced exclusion, IRS has outlined various facts and circumstances (usually referred to as “safe harbors”) that permit the taxpayer to qualify for a reduced exclusion. The safe harbors include:
  • The “distance safe harbor”, which provides that a change in place of employment is considered to be the reason for the sale of the principal residence if the change occurred during the period the seller used the property as his principal residence and the new place of employment is at least 50 miles farther from the home that was sold than the former place of employment was. If the seller didn't have a former place of employment, the distance between the new place of employment and the home sold has to be at least 50 miles.
  • The “physician's recommendation safe harbor”, which provides that health is considered to be the reason for the sale of the principal residence if a doctor recommends a change of residence to obtain, provide or facilitate the diagnosis, cure, or mitigation of treatment of a disease, illness, or injury of a qualified individual (generally, a member of the taxpayer's immediate family) or to obtain or provide medical or personal care for a qualified person suffering from a disease, illness, or injury. If the sale of a home merely benefits a qualified individual's health or well-being, the sale is not because of health for purposes of the exclusion.
  • The “unforeseen circumstances” safe harbor. IRS considers unforeseen circumstances to be the reason for the sale of a home if any of the following events occurred while the seller owned and used the home as his principal residence: an involuntary conversion of the home, certain natural or man-made disasters or acts of war or terrorist attacks resulting in a casualty to the home (whether or not the loss is deductible), death of a qualified individual, unemployment of a qualified individual if that individual is eligible for unemployment compensation), change of employment or self-employment status resulting in a qualified individual's inability to pay reasonable basic living expenses for his household, divorce or legal separation of a qualified individual, multiple births from the same pregnancy, and events identified by IRS as unforeseen circumstances (for example, the September 11 terrorist attacks). For purposes of these safe harbors, a qualified individual includes the owner of the principal residence (the taxpayer), his spouse, a co-owner of the home, or a person whose principal residence is the same as the taxpayer's principal residence.
Good luck and besure to have a Tax professional prepare the return for the year you sell the house.
Old 03-22-2009, 10:07 AM
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Mike, if the home is his personal residence, he cannot claim a capital loss on the sale, even if there is one.
mahi, sorry about not putting in the possibility of the reduced exclusion. He was talking about doing the same thing as before, living in the house long enough to get the exclusion or what would be the capital gain tax. I made an assumption there were no overriding reasons to get the partial exclusion.
Old 03-22-2009, 11:24 AM
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Jal, I have a feeling we do the same thing for a living, are you working today?

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