Discussion:Sale of Home - Capital Gains
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Discussion Forum Index --> Tax Questions --> Sale of Home - Capital Gains
| 11 June 2006 | |
| I have a client that relocated to Chicago from Detroit 2 1/2 years ago... They have not been able to sell their home in Detroit due to the soft market. If they were to sell their home this month would they be "beyond" the 2 year time (I think it is a 2 year time limit) limit to sell their personal residence and therefore have to pay capital gains on the sale of their home.
If it is true that they now have to pay capital gains on the sale of their home ... could they mitigate this capital gains tax liability by re-initiating residency in Detroit again ... and what would the definition of re-establishing residency be.. (obtain drivers license with Detroit address ? ) | |
Michaelstar (talk|edits) said: | 11 June 2006 |
| This falls under IRC sec 121. The taxpayer (t/p)(both husband and wife if that applies) needs to have lived in the residence at least two years of the last five years assuming we are not looking to exceptions on the two years. So really the t/p has three years (fiscal/365 days x 3 years) from the date they moved out of the residence until the date that they close escrow for sec 121 exclusion to apply. To answer your other question - no - they can not mitigate any capital gains by moving back to Detroit. One can not defer the gain on the sale of a residence by "rolling over" the gain into a new house. That law changed back in 1997. | |
| 12 June 2006 | |
| Are you referring to what would happen if they moved back into the house in Detroit? | |
| 12 June 2006 | |
| What if they moved back to their house in Detroit and "commuted" to Chicago ... | |
| 12 June 2006 | |
| At date of sale, look back for a period of 5 years. If during those 60 months taxpayers lived in home for at least 24 months (does not have to be cosecutive) they qualify to exclude portion of gain. You can do this every 2 years. If they move back then there is no sale...no gain. | |
| 12 June 2006 | |
| I would look to the reason of why they moved in the first place. Could their scenario fall under a sitution where the IRS would disregard the 2 of 5 year requirement? | |
| 12 June 2006 | |
| They are teachers for a private school that also has a school in Chicago. Their agreement is to teach at the Chicago school for a 4-5 year time frame and then possibly return to Detroit school. They live in an apartment(i.e. temporary) in Chicago. Is this the type a scenario that the IRS would disregard. | |
| 12 June 2006 | |
| DZ... what is the defintion of "moving back" .. can it be proposed that their primary residence is Detroit and they live in an apartment in Chicago for this temporary (however lengthy - 4 year) assignment ? | |
Michaelstar (talk|edits) said: | 12 June 2006 |
| If one moves due to a change in employment - yes, this is one of the exceptions to the two years. The amount of time that the t/p lived in the home is prorated by days or months to arrive at the prorated amount of the sec 121 exclusion. There is a 50 mile rule - derived from the similar rule relating to the moving expense for the individuals new place of employment. The change in place of employment needs to occur while the t/p owns and uses the home as his principal residence. | |
| 13 June 2006 | |
| Moveback. I meant "there was never a sale." Primary vs temporary??? good luck getting a straight answer from this site. | |
| 14 June 2006 | |
| Michaelstar .. so do you mean that if the move is due to an employment change - there is an exception.. meaning they are not subject to capital gains tax if they haven't sold their home after the 3 year time period ? ... and for example if the home is finally sold after 4 years ? | |
| 14 June 2006 | |
| No, the other way around. I knew he'd confuse you. That exception is for leaving sooner, not later. You've got three years. After that, it's not considered a personal residence. You need to help them with some math. Let's suppose that they face a possible gain of 100k. If they wait, they'll pay 15k in tax, plus the state. Now...knowing that, isn't it worth it to drop the sale price of the house 5-10k and get it sold? Yep. If that's enough to make it work. | |
| 14 June 2006 | |
| I agree with JR1. Reduce the price and get it sold before the 3 years is up. Also, it's costing them just to hold that property even if they don't have a mortgage payment. Insurance, property taxes, and the opportunity cost of having the money tied up should be enough to get them motivated to sell. (Detroit must be the only city in America that has had a soft real estate market during the past 2 1/2 years.) | |
Michaelstar (talk|edits) said: | 15 June 2006 |
| JRI - lets be nice now...........
Djohn - there is no exception to the residence needing to be sold 3 years to the day after the t/p officially moves out (unless they are under military orders which does not apply here). The exception that I have been talking about applies to only the 24 months the t/p lived in the residence - example - t/p lived in home 14 consecutive months then had to move to Chicago for job related move (the exception), the t/p would exclude 14/24 of $250/$500k under sec 121. So back to your original question - if they are to still sell their home and be allowed to exclude the gain under sec 121 - the home must close escrow within 365 days x 3 (1,095 days) after they officially moved to Chicago. I'll check back to see if you have any more questions and try the best I can to help out here. | |
Jfhardwick (talk|edits) said: | 18 May 2007 |
| Does anyone know if there is an IRS definition "primary residence?" | |
Death&Taxes (talk|edits) said: | 18 May 2007 |
| "Principal Residence" is the term used by Sec. 121. In what context do you want to use 'primary?' | |
