We built a new home last year in WI and now potentially have to move. What are the legal/tax issues?

Question

We have lived in the house for less than a year and someone had mentioned that we may not be able to do so. Is anyone familiar with this issue?

Answer 1

Assuming that you can get a sale with enough cash to cover the outstanding loan there are no issues there.

However, if you turn a profit on this you may be facing a short term capital gain which is taxed as ordinary income at your marginal rate.

Normally you must live in the home for at leat 2 of the 5 years immediately prior to the sale to exclude the gain from taxation. However there are situations where you might qualify for a pro-rata portion of the exclusion if you are forced to move due to a job change, etc.

If you won't qualify to exclude any of the gain, do your best to extend the closing date past one year from the purchase date. At one year and one day the gain will be taxed as a long term CG, normally at 15% instead of your higher marginal rate.

Answer 2

Generally, gains are tax-free if you've been in the home as your primary residence for 2 of the past 5 years. First $250K if single, $500K if married, in profits, are free.

I know there is some ability to prorate some of this, depending on the reason for your move. Something like a job transfer might allow you to mitigate your taxes.

You really need to consult a CPA. Shouldn't be too hard to find one this time of year, and shouldn't cost too much to get advice on what for them is probably a fairly simple question. A couple hundred bucks to a CPA might save you thousands in taxes.