Capital Gains Taxes

July 14, 2005 11:33 AM

Question re: Capital Gains taxes on a home sale

If I sell my house, rumor has it (from my uniformed friends) that I don't have to pay taxes on the profits unless they extend beyond a certain amount, specifically $250K per person, so $500K between my wife & I. I'm curious, is this true? Will I have to pay some OTHER form of taxes on this money, or can I really just sell my house, take several hundred thousand dollars & spend it on Oreo cookies & whores with no repurcussions, tax wise?

posted by jonson to law & government (18 comments total)

I'm in the same boat as you, in a way. I could sell my current house for a healthy profit and I've found a great new house I could roll the money into, but unfortunately for me, capital gains taxes kick in if you haven't lived in your current house for at least two years.

If you've lived in your house for more than two years as your primary residence, then yes, you can indeed get up to $500k tax free.
posted by mathowie at 11:48 AM on July 14, 2005

Yes, but be sure to buy some milk too.

You do have to have owned your home for longer than two years though. I was quite skeptical about this when I sold my home last year. Your friends are right.
posted by brheavy at 11:49 AM on July 14, 2005

I think the rule is that you must have lived in the home for at least two of the past five years to get the tax break. Worth checking out, if you've lived there off and on, or have rented the place for some portion of time. A tax adviser would be able to tell you for sure, and a couple hundred dollars to chat with one for an hour would not be a bad investment if you're really looking at a $500K gain.
posted by spacewrench at 12:27 PM on July 14, 2005

The rule is "two out of the last five years" so if you have rented it or moved around a bit, you're still fine as long as you spent two years total living there as your primary residence.
posted by mathowie at 12:46 PM on July 14, 2005

Oreo cookies may be subject to sales tax in some jurisdictions

not if you buy online or in Delaware!

Be sure you also save all the receipts for any expenses made towards the house. That new water heater, it's deductible too.
posted by Pollomacho at 12:47 PM on July 14, 2005

I searched for "Capital Gains House Sale" on the IRS site, and the first thing that came up is Topic 701.
posted by terrapin at 1:37 PM on July 14, 2005

My brother was telling me yesterday coincidentally that if you sell the place in under two years and reinvest the money within 6 months, they you don't have to pay the taxes. So with your 500k you could buy another house, but maybe not oreos, if you're under two years there.
posted by clgregor at 2:04 PM on July 14, 2005

clgregor, everything I've read says that law changed in 1997 and no longer applies. If you sell under two years, they only have a few provisions (in the link I posted in my first comment) to let you show the IRS it was a semi-emergency.
posted by mathowie at 2:48 PM on July 14, 2005

Interesting. What about pro-rating, like if I've lived there for ALMOST two years? Does anyone know about that?
posted by jonson at 2:59 PM on July 14, 2005

Mathowie, et al are correct: 24 months of residency (cumulative not continuous) of the previous 60 months = no capital gains. However, if any portion of the home was rental or business then you will have to pay capital gains on that portion as I sadly learned this year. In other words, if you own a duplex, even if you've lived there for five years continuous, you will have to pay capital gains on the other apartment. Unless, you lived in one apartment for 24 months and then moved into the other apartment for 24 months. Then you'll have lived in both 24/60 months.
posted by Juicylicious at 3:04 PM on July 14, 2005

No jonson, there is no prorating.
posted by Juicylicious at 3:05 PM on July 14, 2005

Sigh... whores & oreos will have to wait....
posted by jonson at 3:30 PM on July 14, 2005

jonson, how close are you to two years? If you're just shy, remember it's likley going to take you 30+ days to get it on the market, sold and closed.
posted by FlamingBore at 3:40 PM on July 14, 2005

I'm only 14 months, so far.
posted by jonson at 8:39 PM on July 14, 2005

If you sell the place in under two years and reinvest the money within 6 months, they you don't have to pay the taxes.

This sounds to me like confusion related to 1031 exchanges. If you have a real estate investment (for example, a rental home) and you sell it, you can avoid capital gains taxes by reinvesting. (The "6 month" period sounds too long, but I've not actually checked this out.)

In short, don't think about a 1031 exchange for a house you've lived in (and didn't rent out part of) - it isn't relevant.
posted by WestCoaster at 8:43 PM on July 14, 2005

Stick it out another 10 months. It will be worth it, unless you will be selling your house for a lose. And, don't forget that the capital gains are calculated what you sell the house for minus what you actually paid for it. So you can't deduct 2nd mortgages. Ten months will fly by.
posted by Juicylicious at 8:46 PM on July 14, 2005

Jeebus. 14 months > $500K appreciation. Who says there's no housing bubble?
posted by grateful at 10:47 AM on July 15, 2005

If my wife and I evict our tenant from the upstairs flat of our duplex (we have owned the duplex for 28 years and the upstairs flat was fully depreciated prior to May 6, 1997) and use the entire house as our main home for the next 2 years (the two units are connected by an interior stairway), can we then sell the duplex and exclude the gain on the upstairs unit up to the $500,000 limit (assuming the current tax laws are still in affect at the time we sell the property)?
posted by javasal at 8:53 AM on February 16, 2006