We're getting ready to sell the house that we've lived in for the past five years and move.

My question is in regard to taxes.

For simplicity, let's say I make $100k on the house after realtor fees. With regard to taxes, I've been told three different things:

Person A
I'll have to pay federal income taxes on the $100k that I make on the house.

Person B
I'll have to pay federal income taxes on however much of that money I DON'T put into my new house. In other words, if I put $50k of that money into the new house I'd have to pay federal income taxes on the remaining $50k.

Person C
In Jan of 1997 they passed a law that says if you live in a residence any 2 of the previous 5 years as your primary residence you can sell that property and make up to 250K as an individual or $500K as a married couple and pay ZERO in TAXES.

Which person is right?

I know Person C very well and he is very big into real estate...so I trust him. However, I have always thought that you had to pay taxes on whatever money you made on a house because it was considered income.

Anyone here know for sure?

 

Who's right? Answer ... persons a, b & c depending on your situation.

 

Person "C" is 100% right. No if's and's or but's.

There are other fancy options even if you hadn't been there 2 years (or it wasn't your "primary" residence.)

The 1032 "like and kind" or "Tax free" exchange is a popular one lately.

You'll be rolling it into another house, right?

 

Care to elaborate?

 

What is 1032 "like and kind" and "tax free" exchange?

I'll be putting some of it down on another house....maybe....but I'll also be using some of it to pay off other debts. That's why I want to know about the taxes and if it is considered "income" or not.

 

Check out the IRS site. Looks like person C was right on!

http://www.irs.gov/faqs/faq10-1.html
I sold my principal residence this year. What form do I need to file?




If you meet the ownership and use tests, you will generally only need to report the sale of your home if your gain exceeds a certain dollar prescribed by law. To determine the amount of gain that can be excluded from income refer to Publication 523 Selling Your Home You may be entitled to exclude gain from income if during the 5-year period ending on the date of the sale, you must have:

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

*** read more on the link above.

 

That pretty much answered my question. Thanks for the link.

 

Refer to person "C", as long as you don't hit the 500K (net proceeds, not sales price) mark, you'll be fine.

The 1032 exchange is used for people to avoid paying capital gains when they buy and sell investment properties. There are very speific time limits and regulations. The one that I am fimiliar with is that once you sign up for the exchange, you must enter into a sales contract within 60 days that will settle within 120 days after that. ALL lawyers and Accountants are up on the tax free exchanges, they are used by like 95% of Real Estate investors.

I just talked to someone in the Barber shop who buys 100's of acres out in Iowa just for the tax advantage when he sells property here on the East coast. The money sits in a bank until he finds suitable property at the price per acre he wants to spend, then the bank dispurses and helps him file the appropriate paper work with the IRS.

 

I won't be anywhere near the 500k mark...or even the 250k mark for that matter.

Thanks for the help fellas. When in doubt, ask DTR.

 

Or use google.

 

Person C is correct. It used to be that you could only profit once on your residence through capitol gains but now the law is as person C has said.

A 1031 exchange is a clever way around paying taxes on property bought and sold that is not your primary residence and is for appreciated investments only. If you exchange it or trade it, then you don't have to pay taxes on the amount you made because you are in affect reinvesting it. It's kind of like rolling a 401k over instead of cashing it out.

 

Starma is right, and I added a # too, the 1032 is a Stock for property exchange.
Heres a breif clip that talks about the tax free exchange, and yes it isn't really tax "free" it's a deferment.

1031/Tenants-in-Common (TIC) Information

What is a 1031 exchange?

Under section 1031 of the Internal Revenue Code, a real property owner can sell his property and then reinvest the proceeds in ownership of like-kind property and defer the capital gains taxes. To qualify as a like-kind exchange, property exchanges must be done in accordance with the rules set forth in the tax code and in the treasury regulations. The 1031 exchange can offer significant tax advantages to real estate buyers. Often overlooked, a 1031 exchange is considered one of the best-kept secrets in the Internal Revenue Code.

 

Why use Google when there is such a wealth of knowledge at DTR? My wife asked me once what we talk about on here that was so fascinating. I told her that this is where we all go to solve the world's problems. So, if we can solve the WORLD's problems then surely we can answer a simple little tax question.

 

Tell him to quit it, people like him make it so a guy can't get anybody to let him hunt.

 

Person C as you already know... I was just reading that when I was doing my taxes w/ TaxCut... Don't you use TurboTax Hoss? It should tell you in there as well...


Tony