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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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capital gains on selling home

Customer Question

If we sell our home only have lived in it for 18 months will we pay capital gains tax? If we put it on the market before we move and wait to sell it until the 2 year mark will we still have to pay captial gains?
Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

You will likely pay capital gains tax unless you meet one of theexceptions below to use a pro-rata exclusion. Below I describe the rules for qualifying for the exclusion or a partial exclusion as well as the tax consequences to having to recognize capital gain.


Under IRC Sec. 121 if as of the date of sale you have owned and used a property as your principal residence for 24 out of the last 60 months, then you can exclude up to $250,000 of gain ($500,000 if married filing joint) if filing a single or MFS return.


If you have owned or used your property as your principal residence for less then 24 months you may not use the Sec. 121 exclusion (i.e. $250K/$500K exclusion) unless you meet a qualified exception. You may use a pro-rata exclusion if the reason you are selling is related to a job change, for medical reasons or for some other unforeseen circumstance (i.e. death, disability, divorce, job loss, financial hardship, etc.). See below for a more expanded explanation of the allowable exceptions.

The pro-rata portion of the exclusion is calculated by dividing the number of days you both owned and occupied the property as your principal residence by 730 days (i.e. two years). Multiply the resulting percentage by $250K if single or $500K if MFJ.


If you do not meet one of the exceptions, then the gain is taxable. Since you have owned the property for more then one year, then any recognizable gain will be treated as a long-term capital gain taxed up to a maximum capital gain tax rate of 15% (5% if the gain would otherwise be taxable in the 10% and 15% brackets).


Most states have conformed to the federal IRC Sec. 121 exclusion rules. If you indicate your state of residence I can confirm this for you.


A sale or exchange is due to a change in place of employment if the primary reason for the sale or exchange is a change in the location of a qualified individual's employment. As a safe harbor, the regulations provide that a sale or exchange is deemed due to a change in place of employment if the change occurs during the period of the taxpayer's ownership of the property and its use as the principal residence and the qualified individual's new place of employment is at least 50 miles further from the residence sold or exchanged than was the former place of employment, (or, if there was no former place of employment, the distance between the qualified individual's new place of employment and the residence sold or exchanged is at least 50 miles).


A sale or exchange is due to health if the primary reason is to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury. A safe harbor is provided for a physician recommended change of residence.


A sale or exchange is due to unforeseen circumstances if the primary reason for the sale or exchange is the occurrence of an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence. Under the safe harbor rules, a sale or exchange is deemed to due to unforeseen circumstances if any of the following events occur during the period of the taxpayer's ownership and use as principal residence; in the case of a qualified individual, death, the cessation of employment if, as a result, the qualified individual is eligible for unemployment compensation, a change in employment or self-employment status that results in the taxpayer's inability to pay housing costs and reasonable basic living expenses for the taxpayer's household, divorce or legal separation, or multiple births resulting from the same pregnancy.


The unforeseen circumstance exception is rather open-ended and is subject to the taxpayers facts and circumstances. If none of the above exceptions applies, give me some more detail about the reasons for the sale and I can then give you my opinion about whether a pro-rata exclusion may be available.


Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose.



Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: We are moving from AZ to Mississippi due to employment change on our parts. We moved into our house in mid february 2004 and most likely will sell late july early august 2005. Will qualify for the change of employment exception?
Expert:  Christopher Phelps replied 11 years ago.

AZ conforms to the federal tax code on the sale of principal residences, so your state tax treatment of the gain will be the same as for federal purposes.


I believe you are correct in your interpretation. Thus, you appear to qualify for a pro-rata exclusion under the job change exception. Assuming you will have owned and used the property as your principal residence for 18 months, then you will be entitled to exclude up to $375,000 of gain (i.e. 18months/24 months). When you do the actual calculation use the actual number of days owned and used divided by 730 days (i.e. two years).


Any gain above the $375,000 exclusion will be taxed as described above.

Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience: CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
Christopher Phelps and 2 other Tax Specialists are ready to help you
Customer: replied 11 years ago.
Reply to Christopher Phelps's Post: What if we rent our house for a couple of months before we sell, will that change any of the above exceptions to the 2 year rule?
Expert:  Christopher Phelps replied 11 years ago.

No, it does not change anything related to the exclusion.


However, in calculating the available exclusion, you may not count the days rented as days you owned and used the property as your principal residence.


You would have to declare the income as rental income on your tax return on Schedule E. You would also be able to offset the rental income with any cash expenses PAID during the rental period including mortgage interest, HOA dues, repairs, utilities, etc. You would also be able to depreciate the property (and consequently reduce your cost basis) however, such depreciation would be recaptured on the sale of the property and taxed at a maximum rate of 25%. I would not bother claiming depreciation unless you rent into 2006.


Thanks for the payment!


Because it is impossible for me to identify and consider ALL the relevant facts, this advice is not intended or written to be used for the purpose of avoiding penalties, and cannot be used for that purpose

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