Capital Gains tax?

Question

In September of 2005 I purchased a home ($100,000) with a friend. In August 2006 he moved out, quitclaimed the deed due to mental illness. Since then I have paid the home mortgage that I had refinanced in my name, quit my old job and started a new one...My fiancé and I are now going to purchase our own home and we are expecting a child! Here is my question. I have not lived in my home for the complete 2 years however it has been my main home and never investment property. I believe I can make a small profit from the sale, only because the environment has recently changed around it. I would like to avoid Capital Gains tax on the less than 20,000 I may make. Is there any way to do this considering the new home we buy will also be in my name and will be my new main residence? Thanks for your help. B.

Answer 1

A 1031 Exchange might be a good route for you to go. You were probably going to put the money down on a new house anyways, right? A 1031 Exchange, also known as a Like Kind Exchange or Starker Tax Deferred Exchange (named for an investor who challenged and won a case against the IRS) is a transaction under United States law which specifies under section 1031 of the Internal Revenue Code, 26 U.S.C. § 1031the following:

"No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment."
This allows taxpayers to defer all of the capital gains taxes resulting from the sale of investment property, when they use a Qualified Intermediary, follow the IRS guidelines, and use the proceeds of the sale to buy more investment property within 180 days of their sale. In order to obtain full benefit, the replacement property must be of equal or greater value, with equal or greater debt, unless the taxpayer adds cash to the deal to replace debt instead, and all of the proceeds from the relinquished property must be used to acquire the replacement property. The taxpayer must have assigned his interest in the relinquished property to a Qualified Intermediary prior to the close of the sale, so that the taxpayer has lost control of the funds before he has any opportunity to obtain them.

At the close of the relinquished property sale, the proceeds are sent by the closing agent to the Qualified Intermediary, who holds the funds until such time as the transaction pertaining to the replacement property is ready to close. Then the proceeds from the sale of the relinquished property are deposited by the Qualified Intermediary to purchase the replacement property, which is then delivered to the taxpayer, all without the taxpayer ever having "constructive receipt" of the funds.

The prevailing idea behind 1031 Exchange is that since the taxpayer is merely exchanging one property for another property(ies) of “like-kind” there is nothing received by the taxpayer that can be used to pay taxes with. All the gain is still locked up in real estate and so no gain or loss can be claimed.

By the way, Congrats on the baby!! Is it your first? It's such a wonderful experience, it truly is! Also, if you were thinking of selling your home FSBO, my company offers a Revolutionary FREE FSBO System called Silver Gate powered by First Republic Funding. It will help you find a qualified buyer Faster! And, we can assist you every step of the way! From selling your home, your new home financing and more! E-mail or IM me for more info. Best of luck to all 3 (well, 2 1/2 right now) of you! :)

Answer 2

If you can demonstrate that the sale was due to "unforseen circumstances" there's an exception to the 2 year rule that lets you take a prorated exclusion which would more than cover your anticipated $20K gain. You might or might not qualify for that thoughif the sale is seen as just for your personal convenience, you wouldn't qualify. If you've moved to a new area and gotten a job there, you'd qualify for the reduced exclusion.

Answer 3

No, we'd desire to incourage investment to create jobs. whilst Ronald Reagan diminished the fees additional money got here into the treasury. No financial equipment has ever been inspired by using extra desirable taxes. shrink taxes and extra jobs would be created and much less human beings will choose for government information. Tax sales pass up and expenses down.

Answer 4

Because you actually live in the house, and because you are taking the "profit" and putting it down on your new house, I do not believe Capital gains would come into play at all.

Call a CPA and see what they say.