Captial Gains on Primary Residence?

Question

Dh & I owned a home 2005 (home number 1), he lost his position through a company buyout that same year after 10 years of employment. Through the buy out money, with a 401 cusion, we opened a business, sold home number 1 and invested in home number 2 in 2005 because we needed business space. New business failed, then we were forced to sell home number 2 due to ability to pay our bills. Not profitting but making only what was invested in both homes. This occured in April of 06. We then bought a lesser valued home May of 06, remodeled it, have been restored financially and want to move back into a larger, nicer home. We have manged to keep our credit good and the banks have prequalified us to purchase another home. We will profit from this home but only about 50,000. However, knowing that we could get hit with Captial Gains is a scare. What do we risk selling this house and buying a more valuable home this year since we have sold 3 in the last 2? Does the unemployment situation help us?

Yes, we have about 30,000 invested in hard materials.. This doesnt include my labor cost. I read somewhere on the irs page that if you had a job loss this would exclude you. I am not sure if I read it right or if it applies to our situation. We want to take the money we get out of the sell and apply it all to another home. We also will have realtor fees, does that help?

We purchased the home and then remodeled it, hoping to stay here. We invested approximatley 30,000 in materials and some outside labor cost. Dh and I did the remainder of the labor ourselves. It was a long haul. 6 months and I still have painting and finishing work to do. Actually, now that I am calculating the cost, here are the hard numbers: 50,000 minue the realtors fee would leave approx 41,000 then we deduct the 30,000 for materials leaving 11,000. I have not included our labor cost in that number. We have put in our own labor night and day for the last 6 months and still have finishing work. We have restored plumbing to sheetrock. Its been a long hard road..

Someone told us that because dh lost his job and we were unable to make keep the mortgage that this would benefit us. Dont know if that is true? Also, we lost all of our funiture, jet ski, camper etc.. we sold it all trying to pay off revolving debt to keep our credit from getting hit to badly.

Actually, just a figure, we are adding 9000 on realtor fees, will we be required to pay gains on that.

Also, regular income: dh only, makes 90,000 annually. I am a stay at home House Godess..

Goddess:: See what staying home can do?

If that is the case and we dont have to pay gains on the entire 50, I am not too worried about getting hit with 3 of that..

Is this fact:

It is calculated at an amortized rate, which is prorated throughout the 2 years? With a number being 500,000, that we are ok, if in fact it is prorated.

We have been here since May of this year.

Answer 1

Gain on the home #1 should be excluded from income up to $500,000 (assuming married filing joinlty). Home #2 you said there was no gain. On home #3 you gained $50,000. That gain is taxed at a maximun rate of 28% or $14,000. If your have little or no other income, it could be as low as 5% or $2,500. Without knowing your other income, I can only say, taxes are not the only thing to consider.

If I read you 'additional details' correctly, your actual gain is around $11,000. Did anyone mention that what you pay the realator reduces your gain? At 28%, capital gains tax on $11,000 = $3,080.

Answer 2

You can't use a 1031 exchange for your personal residence.

You need to have owned and lived in the house as a primary residence for 2 of the last 5 years to claim the exclusion. It does not sound as if you meet those tests.

Since your reason for selling the remodeled house is to move to a larger house, I do not believe that you would qualify for a reduced maximum exclusion. Do you still have a potential $50K gain after adding the costs of remodeling to your basis?

Answer 3

Sorry, you can not do a 1031 exchange on a personal residence.

You will have to pay capital gains tax on the $50k. Remember, to add your improvements to what you paid for it originally. As this is a short term gain, you will be taxed at your normal rate. If you stay past May 2007, it would be taxed at 15% and if you stayed past May 2008, the gain (up to $500k) would be tax free.

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If you keep looking, you can probably get that gain down to next to nothing. Remember one thing though, your "labor" is worth nothing. We are all give 24 hours a day and it doesn't cost us a thing.

Answer 4

As usual, Steven F has good advice.

The only other thing I'd mention is that the value of your labor can't get figured into the calculation - you don't get to subtract that from your gain.

Answer 5

There are a few things you can do. I work for a mortgage company so I deal with this all the time, the best thing you can do is a 1031 exchange.