Q: My wife and I sold our home in 2003. We had lived in it for four years, then built a home and moved into it in February, 2004.
We’d like to sell our home now, purchase a lot, and then build in mid-2006. We’re about 6 months short of the 2 year own/use criteria for keeping our capital gains tax free.
Will we able to avoid or defer the capital gains tax from the sale of our home (which will be less than $500,000) if we roll all of the gain into the purchase of a lot?
Assuming we can exclude the tax from the gain, will there be any restrictions on avoiding capital gains on the home we’re planning to build in mid-2006, if for some reason we decide to sell this next home?
A: The old rollover replacement rule for residential homes does not exist. So, you cannot defer taxes by rolling over the property into a new property purchase. Here’s the skinny on the capital gains tax rules for home sellers.
As long as you’ve lived in your home as your primary residence for two of the past five years, you can exclude up to $250,000 (if you’re single) and up to $500,000 (if you’re married) in profits from the sale of your home. Any gains you have above that mark are taxed as a long-term capital gain.
One other rule for taking the exclusion is that you can only take it once every 24 months.
If you’ve lived in your home for less than 2 of the past 5 years, you may still be able to exclude a proportionate share of the gain if you sell because you are getting divorced, moving to take a job that is 50 miles away from your old job, or have a serious health problem that requires you to sell to buy something else.
But it doesn’t sound as though you would qualify for the partial exclusion based on any of those factors.
So the smartest thing you can do is to wait until February 2006 to close on the sale of your property. That way, you can take all of your gain tax-free instead of paying long-term capital gains tax.
As for the next home you’re building, you will have to live in the home as your primary residence for at least two years before you can claim the tax-free exclusion again. So if you build the home in mid-2006 and move into it by the end of 2006, you will need to wait until 2008 in order to exclude your gain.
What you’re doing sounds like a lot of work, but if you plan right, it sounds like you could be adding significantly to your annual income.
For more information on the tax implications of selling your home, check out IRS Publication 523 “Selling Your Home” at www.irs.gov.
Published: Aug 24, 2005