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Ed Johnson
Ed Johnson, Tax Preparer
Category: Tax
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Experience:  GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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My husband and I bought our first home in December of 2004.

Resolved Question:

My husband and I bought our first home in December of 2004. In August of 2006 we bought our second home and kept our first as a rental property. We are getting ready to sell the first home. Will we have to pay Capital Gains? If we take the money made from the sale and put it directly into the purchase of another home will we still have to pay capital gains?
Submitted: 7 years ago.
Category: Tax
Expert:  Ed Johnson replied 7 years ago.



According to the rules, as long as you have lived in the home for 2 of the past 5 years and owned it, then you can still take advantage of the capital gains exclusion. So even though you have been using the first home as a rental, if from the date of closing, going back 5 years, if you had lived in and owned it as your primary residence, you can still take advantage of the capital gains exclusion.


however a word of caution.


The capital gains formula for a rental home is:


Capital gains (rental) = sell price -(original purchase price, + improvements, + major repairs, + Hud 1 costs not previously taken, - accumulated depreciation) - cost of selling.


so why do you suppose that we take the depreciation out? because the IRS will still take the recapture of accumulated depreciation by assessing a 25% tax on the depreciation.





Customer: replied 7 years ago.

Isn't it technically less than two years?

Expert:  Ed Johnson replied 7 years ago.



what do you mean technically less than two years. It has to be a full 24 months, to the day.


There is an exception if you are required to sell the home for unforeseen circumstances.


Unforeseen circumstances are such things as:


  1. natural disasters
  2. man made disasters
  3. death
  4. illness
  5. health
  6. change in financial circumstances such that you can no longer pay the mortgage and still afford basic necessities.
  7. change in job such that you are on unemployment
  8. change in job requiring you to relocate and relocation is beyond the safe harbor miles.

In the unforeseen circumstances situation, then you may take an apportioned amount of the maximum capital gains exclusion. this is called a reduced capital gains exclusion.


There is no roll over of the primary home.


If you roll the firs home into a new rental unit, you can defer capital gains by what is called a like kind exchange. To be a like kind exchange you have to have designated the exchange prior to closing, and you have to use an exchange agent. You have only six months form the sale to complete the exchange.


The catch 22 is, you can not like kind exchange a primary residence.


AND you do not technically avoid capital gains tax, you defer it to another day in the future.




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