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  #1  
Old 01-30-2005, 08:56 PM
uter's Avatar
uter uter is offline
Z4 M coupe, F07 550i GT
Location: Scottsdale, AZ
 
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Capital Gains Tax: what if you owned<2yrs?

Got a question about calculating capital gains tax. Anyone with experience is welcome to offer an opinion.

1. Owned my current residence 23 months, but I've only lived here as my primary for 20 months. (After I sold my old condo, I rented it back for 4 months).

2. Just accepted an offer for my current house and they want to close in a few weeks; one week short of the anniversary of my closing almost 2 yrs ago.

3. I'm told that if you're under the 2 yrs mark for living in the property as your primary residence, that capital gains is pro-rated. i.e., the capital gains tax owed will be calucated based on the fraction of time I lived in the property (20 of 24 months).

Does this sound right?
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  #2  
Old 01-30-2005, 09:13 PM
operknockity's Avatar
operknockity operknockity is offline
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Location: On the bleeding edge of last week
 
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Seems right, but check all the little fine print in IRS Publication 523 (at http://www.irs.gov/publications/p523/ar02.html) to make sure you meet all the criteria for a pro-rated exclusion :

Quote:
Excluding the Gain

You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion, next. To qualify, you must meet the ownership and use tests described later.

You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. This choice can be made (or revoked) at any time before the expiration of a 3-year period beginning on the due date of your return (not including extensions) for the year of the sale.

You can use Worksheet 2 to figure the amount of your exclusion and your taxable gain, if any.
Maximum Exclusion

You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.

1. You meet the ownership test.
2. You meet the use test.
3. During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed.

You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.

1. You are married and file a joint return for the year.
2. Either you or your spouse meets the ownership test.
3. Both you and your spouse meet the use test.
4. During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.

If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property.
Ownership and Use Tests

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

1. Owned the home for at least 2 years (the ownership test), and
2. Lived in the home as your main home for at least 2 years (the use test).

Exception. If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. The maximum amount you can exclude will be reduced. See Reduced Maximum Exclusion, later.
and

Quote:
Reduced Maximum Exclusion

You can claim an exclusion, but the maximum amount of gain you can exclude will be reduced if either of the following is true.

1. You did not meet the ownership and use tests, but the reason you sold the home was:
1. A change in place of employment,
2. Health, or
3. Unforeseen circumstances (as defined later).

2. Your exclusion would have been disallowed because of the rule described in More Than One Home Sold During 2-Year Period, later, except that the reason you sold the home was:
1. A change in place of employment,
2. Health, or
3. Unforeseen circumstances (as defined later).

Use Worksheet 3 to figure your reduced maximum exclusion.

A change in place of employment, health, or unforeseen circumstances (whichever applies) is considered to be the reason you sold your home if either of the following is true.

1. Your home sale qualifies under a “safe harbor.” A safe harbor is a set of certain facts and circumstances that qualifies you to claim a reduced maximum exclusion. The safe harbors are explained in detail later.
2. The primary reason you sold the home was a change in place of employment, health, or unforeseen circumstances. Factors that may be relevant in determining your primary reason for sale include whether:

1. Your sale and the circumstances causing it were close in time,
2. The circumstances causing your sale occurred during the time you owned and used the property as your main home,
3. The circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home,
4. Your financial ability to maintain your home materially changed,
5. The suitability of your property as a home materially changed, and
6. During the time you owned the property, you used it as your home.
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  #3  
Old 01-30-2005, 09:19 PM
uter's Avatar
uter uter is offline
Z4 M coupe, F07 550i GT
Location: Scottsdale, AZ
 
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I appreciate the reference. I'll check it out.
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  #4  
Old 01-31-2005, 10:37 AM
brkf's Avatar
brkf brkf is offline
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Quote:
Originally Posted by uter
Got a question about calculating capital gains tax. Anyone with experience is welcome to offer an opinion.

1. Owned my current residence 23 months, but I've only lived here as my primary for 20 months. (After I sold my old condo, I rented it back for 4 months).

2. Just accepted an offer for my current house and they want to close in a few weeks; one week short of the anniversary of my closing almost 2 yrs ago.

3. I'm told that if you're under the 2 yrs mark for living in the property as your primary residence, that capital gains is pro-rated. i.e., the capital gains tax owed will be calucated based on the fraction of time I lived in the property (20 of 24 months).

Does this sound right?
No cap gains if you put your dough into an escrow/holding account. you gotta buy your new place and drop the money right in though - i believe it's based on selecting the new prop within 60 days and closing within like 6 months. no taxes then.

It's called a 1031 tax deferred exchange. It's a slick little number.

Last edited by brkf; 01-31-2005 at 10:44 AM.
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