confused about capital gains tax- what if you don't have mortgage?

Question

I've never sold a house before and plan to sell mine next summer. I bought it in august 2006 but did not move in full time until december 2006. I was staying there about a week per month until december, but was paying taxes, utilities, etc. So does this mean that if I wanted to sell it in august of 2008, I will still have the capital gain tax applied to me? Would I have to wait and sell it in december of 2008? I think it'd be difficult to sell a house in the winter. Also, I have full ownership of the home and am not making mortgage payments, does this make any difference?

Answer 1

No difference. The IRS gets to tax gain whether you have a mortgage on that property or not.

Answer 2

Whether or not you have a mortgage is of no consequence as far as any capital gains tax is concerned.

In the US, you must live in the home as your principal residence for 2 full years out of the 5 years immediately prior to the sale in order to exclude the gain from tax.

Although the 2 years do not have to be continuous, from what you have posted it sounds like Dec 2006 was the time frame that you made the home your principal residence so you cannot exclude the gain if you sell prior to Dec, 2008. There might be an argument that the weeks you lived there between August and December that it was your principal residence but that only adds up to 3 or 4 weeks. That would push your earliest possible safe sale date into November, 2008 at best.

Make sure that you can substantiate your move-in date and that you don't sell until 2 full years from that date to be safe. If you made it your principal residence in late December and sell in early December you would risk losing the exclusion for the sake of a few days.