Technical question about future home sale and tax implications.?

Question

I am considering selling my home. I bought it about three months ago at a very steep discount but need to move on. (very long story) I understand that if I live in it for a total of 2 years and then sell, I will have no tax liability on the gain. I may need to sell sooner than that.
I need to understand the difference between selling before one year of ownership and after one year of ownership (but before two years)
I've read a few articles on it, but it's still not clear. If I sell before one year of ownership, do I just count the gain as ordinary income? Would it just go on my taxes as "wages" or would I report it somewhere else?
If I sell after one year of ownership (but before two years), is it taxed as a long term capital gain? If so the rate would be 15% or 5%, depending on my tax bracket?
Any help would be greatly appreciated. Thank you!

Thanks for the help. Here's the additional info:

Bought for $110,000
Will sell for around $135,000
No other properties bought or sold.
I am married with 2 kids.

Answer 1

You are partly wrong about living in it for 2 years. What you have to do is live in it as your primary residence for 2 out the 5 years before you sell it. If you do this you can exempt up to $250,000 of gain if single, and $500,000 of gain if married. If you sell it before 1 year of ownership, it is short-term capital gain, and would be reported on Schedule D, and be taxed at your regular tax bracket. If you sell it after 1 year but before the 2 years, it would be long-term gain, and taxed at either 5 or 15% depending on your tax bracket. If you sell it in 2008 a rate of 0% will replace the 5% tax. There are some exceptions that will enable you to prorate the gain if you sell it before the 2 year holding period (forced move because of job, etc.).

Answer 2

I agree with the answers given, except for the first one. You cannot deduct the mortgage payments, only the mortgage interest paid and real estate taxes, management fees, utilities if you pay them, repairs and maintenance, insurance. And you would use Schedule E to report all the rental income you received that year, and then below it list the expenses, mentioned above. As also mentioned, you would depreciate the condo over the 27.5 years, which would give you a little more off the rental income. Keep in mind though, that when/if you sell the condo, if you personally had lived in it for 2 out of the prior 5 years at the time of the sale, you can exclude up to $250,000 (if single) or $500,000 (if married) of the gain on the sale (which is the difference between what you paid originally for it plus major improvements, not carpet or paint). If this is the case, then you would simply have to recapture some of the depreciation expensed prior to the sale, and you're done. I would highly recommend having a professional tax preparer handle your taxes in the year of sale, to be sure the rental Schedule E and the sale of the condo is closed out properly. If you don't intend to sell that soon, than just keep your income and expenses each year, file on E and you're good. Keep your receipts and written down info as to what you are claiming with each year's tax return, in case you are randomly pulled for an audit.

Answer 3

If you sell before the two years, and not for reasons like a job move or health problems, you'd pay capital gains tax on the gain. Remember to subtract things like realtor's commissions from your gain.

In either case you'll show the gain on a schedule D, but if you sell before you own it for a year and a day, you'll show it on the top section as a short term capital gain which is taxed as ordinary income - if you hold it longer, it will be long term gain and qualify for special lower tax rates.

Answer 4

When you sell it prior to meeting the 2 year rule, the gain is a taxable capital gain and is reported on Schedule D. If you own if for one year or less, it's short term and is taxed at your margainal rate. If you own it for over one year, it's long term and then is taxed at 15% or 5%, depending upon your bracket.

However, if you have to sell early for a job change or certain other unusual circumstances you may still qualify for a pro-rata portion of the exclusion.

See IRS Pub 523 for a complete discussion: http://www.irs.gov/pub/irs-pdf/p523.pdf

Answer 5

What was the reason you're selling your home? If it was because of a certain list of reasons, then you can probably exclude the gain on the sale. The IRS list of reasons include: your/spouse's change in place of employment; your/spouse's/child's health reasons; your/spouse's unemployment; and divorce.

If one of these reasons applied to you, divide the number of days you've lived in the house (up to date of sale) by 730. Then multiply that number by $500,000. That's the maximum amount of gain on the sale that you can exclude from income (and not have to pay taxes on the gain). Again, you have to sell the house for one of the reasons specified by the IRS.

A complete and detailed list is in IRS Publication 523 -- Section labeled "Reduced Maximum Exclusion" on page 14(http://www.irs.gov/pub/irs-pdf/p523.pdf).

If none of these reasons apply to you and you haven't lived in the house at least two years, then you'd have to report the gain as income on your tax return. If you've lived there at least one year, you would pay taxes on the gain at the rate of 15% (or 5% if you're in one of the two lowest tax brackets).