Home Sale : Taxes on profit?

Question

If i have lived in a house less than two years and i decide to sell and purchase a new house are my taxes prorated depending on the months i lived in the house? If so i lived in the house for 20 months, what will my t.axes be in a profit of $60,000?Is there anyway to avoid paying taxes on the profit? The reason of the move is just to purchase a new house, no job change or illiness

How does the IRS define unforeseen circumstances?

Answer 1

You can prorate under certain circumstances, but just to purchase a new house is not one of those circumstances. So you will taxed in full on the whole $60,000. The good news is that since you have lived in the house for more than 1 year your gain will be long term gain. The bad news is that there is no way to avoid paying taxes on the profit. But, since you've lived in it for 20 months, why not just live in it for another 4 months, and then none of your profit (since it's less than $250,000) will be taxable.

Answer 2

If you just decide to move then you must live in the home for 2 of the 5 years immediately prior to the sale to exclude the gain on sale from taxation.

There is an exception that allows a pro-rata exclusion if you lose your job, change your job, or must move due to illness or other unusual circumstances. However, since you are just moving as a matter of personal preference you get NO exclusion if you sell it prior to having lived in it for a full 2 years.

The tax on $60k long-term capital gain would be $9k, 15% of the gain in most cases. You can avoid that by waiting 4 months.

Answer 3

There's no pro-rating of the exclusion if you just decide to buy another house before the two years is up. It might pay you, if you're that close, to just stay another few months so you meet the two years.

As you have found out, a job change or illness is considered a reason that allows you to pro-rate the allowable exclusion for the months you lived there. "Unforeseen circumstances" would have to be pretty close to one of those as a reason - they'd probably accept something like moving to be near a very ill parent or a child in trouble. Moving just because you want to would DEFINITELY not qualify.

Acmeraven is thinking of the old rules - they haven't been in effect for many years.

Answer 4

One day short of two years without a qualifying reason and the gain will be subject to Capital Gains tax. It's all or nothing. No proration.

Answer 5

Judy and Bostonian are correct. You will have to pay capital gains tax on the gain if you have used the house for less than two years aggregate out of the five years prior to the sale.

Section 121 of Title 26 of the U.S. Code covers the exclusion law. http://www.law.cornell.edu/uscode/search/display.html?terms=unforeseen%20circumstances&url=/uscode/html/uscode26/usc_sec_26_00000121----000-.html

The unforeseen circumstances exception means the primary reason for the sale or exchange of the residence must be an event that the taxpayer did not anticipate before purchasing and occupying the residence.

The specific U.S. Treasury Department Regulation regarding this issue is Treasury Regulation Section 1.121-3

http://a257.g.akamaitech.net/7/257/2422/10apr20061500/edocket.access.gpo.gov/cfr_2006/aprqtr/26cfr1.121-3.htm

Answer 6

You wil have to pay Capital Gains tax, my friend. Say thank you to our wonderful government and tax system for that.

Answer 7

If the new house you purchase is equal to or more than the house you sold then the profit you made is rolled into the new one; tax deferred.