Q: We moved into our first home in May 27, 2003 and recently we purchased a new home that is one mile away from our current home. The new home will be built sometime between March and May of 2005.
Our plan is to live in the new home for about 1 to 1 1/2 years before we move to another state due to another job. What are your recommendation regarding the timing of selling our homes to avoid taxes?
A: You might be alright, assuming the tax laws regarding profit on a home sale stay where they are now.
Current tax law permits a homeowner to keep up to $250,000 in profits (up to $500,000 if you’re married) as long as you’ve lived in the home as your primary residence for two of the past five years.
For the house you purchased in 2003, I’d make sure to stay there until your 2-year anniversary is up in order to claim your profits tax-free.
Your new home is another story. In your letter you state that you’ve “purchased” the new home, but add that it won’t be finished until next year. I’m guessing that you didn’t really have a closing and take title to the new property.
What you’ve probably done is put down some cash for a down payment and signed papers agreeing to purchase the property once it is complete, and the developer obtains a certificate of occupancy for the home.
The day you have the closing is the date the clock starts ticking from a tax standpoint. You have to stay two years, or 24 months, or you will have to pay long-term capital gains on your profit, which could be up to 15 percent.
But there are some exceptions to the tax law, and you may fall under one of them.
The law states that if you have to sell your home to take a job that is more than 50 miles away from your current job, you can take a proportionate share of your profit tax-free. (You can also have an exception if you have to sell for health reasons or what the IRS calls “unforeseen circumstances,” which could include divorce.)
For example, if you live in the house for 18 months, that’s 3/4 of the total amount of time the law says you should live in the home in order to keep your profits (up to the $250,000/$500,000 level) tax-free. Multiply the $250,000 or $500,000 amount (depending on whether you are single or married) by .75 and you get either $187,500 or $375,000.
As long as you meet the other guidelines, you should be able to keep up to $187,500 (or $375,000 if you’re married) in profits tax-free if you live in the house for 18 months before moving to another state to take a new job.
That’s pretty generous. If you’re going to have more profit than that, you’ll have to pay 15 percent capital gains tax on the excess above that amount. (But if that’s true, you should consider giving up your day job and just going into real estate for a living!)
Please pay a visit to your tax advisor or accountant for more details on the tax law. The only wrinkle I can see is that you can only use the tax-free exclusion on the sale of profits from a primary residence once every 24 months. But because you are selling due to a change in job, this may not apply to you.
You can also go to the IRS.gov website and download publication 523, “Selling Your Home.”
Published: Sep 10, 2004