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Author: OctoberDaisy Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121567  
Subject: Capital Gains Tax/Selling a Home Date: 10/19/2005 10:22 AM
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OK, here's the situation:

My husband and I own a small home in CT which we bought from family for well below market value ($75K) 7 months ago. The home appraised at $168K before we updated the kitchen, windows and other various and sundry items. We expect to sell for $200K, which would realize a profit of $125K before we pay the real estate agent commission and other related expenses.

We expect to sell around May of next year, which would put our length of ownership at 12 months; as you know, this is below the minimum of 24 months required for the $500K capital gains tax break for married couples.

I understand from reading the IRS regulations that if we move further than 50 miles away from our original location for employment we can get a modified tax break (we are planning on relocating to NH). Seems that with a modest profit we would be safe from paying capital gains tax.

What are your thoughts?

Some follow-up questions: at what point in the selling/buying process does all this get calculated? Do we need to have a job secured in NH before being eligible for the tax break? Is this a calculation solely for the lenders, or do the agents get involved? What other questions should I be asking??

I did cross-post to the buying/selling a house board, but thought it might be helpful to also get some insight from the tax experts. ;)

Thanks in advance!!
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Author: TMFPMarti Big funky green star, 20000 posts Home Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81146 of 121567
Subject: Re: Capital Gains Tax/Selling a Home Date: 10/19/2005 11:25 AM
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My husband and I own a small home in CT which we bought from family for well below market value ($75K) 7 months ago.

You don't actually say so, but I'll assume that this has been your principal residence since you bought it.

The home appraised at $168K before we updated the kitchen, windows and other various and sundry items. We expect to sell for $200K, which would realize a profit of $125K before we pay the real estate agent commission and other related expenses.

Remember that major improvements add to your basis. See IRS Publication 551. Publication 523 has the details about the exclusion and calculating gain and the pro-rated exclusion.

We expect to sell around May of next year, which would put our length of ownership at 12 months; as you know, this is below the minimum of 24 months required for the $500K capital gains tax break for married couples.

I understand from reading the IRS regulations that if we move further than 50 miles away from our original location for employment we can get a modified tax break (we are planning on relocating to NH). Seems that with a modest profit we would be safe from paying capital gains tax.


If the sale is "due to" a change in employment, the law allows a pro-rated exemption (pro-rated by time). IRS has said that if the move meets the requirements for deducting moving expenses (see Publication 519), they will not question a pro-rated deduction. Check those requirements and let us know if this is a problem.

What are your thoughts?

Some follow-up questions: at what point in the selling/buying process does all this get calculated?


After closing.

Do we need to have a job secured in NH before being eligible for the tax break?

No, but. This is where you get back to us if Pub 519 shows a potential problem.

Is this a calculation solely for the lenders, or do the agents get involved? What other questions should I be asking??

Neither the lenders nor the agents have anything to do with this. Given what I've heard some (not all) agents say, don't go to them for tax advice.

Phil

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Author: fleg9bo Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81147 of 121567
Subject: Re: Capital Gains Tax/Selling a Home Date: 10/19/2005 1:45 PM
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My husband and I own a small home in CT which we bought from family for well below market value ($75K) 7 months ago.

Nobody said anything about this, perhaps because the OP didn't ask, but couldn't this trigger some gift taxes on the part of the family members who sold the house to the OP?

--fleg

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Author: OctoberDaisy Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81188 of 121567
Subject: Re: Capital Gains Tax/Selling a Home Date: 10/22/2005 2:26 PM
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Phil, thanks for the response because a huge 100-watt lightbulb went off in my head as I was reading it. Here I am thinking that this all will take place at the time we sell our home and purchase a new one. Well I realize now that OF COURSE it won't! We need to reconcile with the IRS, not the lender or agents. That will happen at tax time. Whoa, duh...LOL!

With regard to the gift tax -- my MIL did so much work to the house prior to her selling it to us that a lot of the tax was offset by her improvements (and yes, I know she's the best MIL!).

Thanks for the input (and clarification!).

\|/
-@- Daisy
/|\

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Author: NaggingFool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 81189 of 121567
Subject: Re: Capital Gains Tax/Selling a Home Date: 10/22/2005 4:06 PM
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With regard to the gift tax -- my MIL did so much work to the house prior to her selling it to us that a lot of the tax was offset by her improvements

I don't think that means what you think it means.

First issue - the taxes on the sale that your mother-in-law owed. She sold the house for more than she bought it for. Since she had less than $250,000 gain, if she had lived in the house for more than 2 years of the five years before selling then she didn't have any capital gains taxes due.

Second issue - whether taxes due on the gift of the house. Gifts from one individual to another under $11,000 per year are untaxed. Above that the person giving the gift owes taxes. One can use the inheritance exemption amount up early, but it still needs to be taken care of when the gift is given. (Sorry I'm not being clearer but it's not an area I've dealt with personally so I'm fuzzy on the details.)

Your MIL didn't give you the the whole house. But she sold you the house at below market value. The difference between the market value of the house and the price you paid her is a gift -- a $93,000 gift in your case. Your MIL owed gift taxes on the $71,000 she gave to you and your husband when she sold you the house.

Third issue - your selling the house now and owing or not owing taxes on it. I think you understand that now, but just a reminder that the profit on your house is $200k - (cost of improvements you did) - $75k. So it will be less than $125k; how much less depends on how expensive the improvements were.

- Megan


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