Selling Real Estate, and Not Buying Again Immediately
June 28, 2012 12:59 PM   Subscribe

My house sold earlier this month. I am not buying a new house right away, but... maybe? How long can I wait? How will this affect taxes? And if I could buy property, should I in order to avoid penalties (if there are any)? You are not my lawyer or my accountant, but way more details with a little bit of drama after the jump.

Located in Missouri, USA.

I (female) owned the house with my former domestic partner (spiritually, but not legally married) as Joint Tenants. We bought it outright and owned it for just over 6 years. It was my sole residence for all of that time. She moved out in summer 2009 and now lives in another state. Upon selling, we agreed to an 85/15 split of the proceeds, so I received about $25,000 cash from the sale.

I moved in with my boyfriend when the house sold. Our plan is that we will be engaged later in the year, commingle finances at that time, and then get legally married in spring 2013. My boyfriend purchased this home in 2008 and has a mortgage. At some point, I will use the proceeds on my house to invest in his house and become a co-owner of his property. But I don't know what the best timing for this process would be, and how it will affect my taxes. I am hoping you will help shed some light on this, so that we can make the best decision, timing-wise.

If all things were equal, I'd wait until we were happily engaged with combined finances, and then we'd start the paperwork for this with legal marriage on the horizon, so spring 2013. After my experience with my ex, I know that joint home-ownership is a huge legal entanglement that should be saved for wholly committed couples. I see it in the same light as legal marriage. My boyfriend and I have been together about 15 months, and we are very happy and in love, but it still seems early and I'm concerned with jumping too far too fast! We're still transitioning to cohabitation right now, and the boxes aren't even unpacked.
But we'd both want to avoid the tax penalties as much as possible, and there may be other reasons (like getting in while the mortgage rates are still low) to move forward a little sooner rather than a little later. There's just not that much difference between doing this in December 2012 and April 2013. It's only a few months, and we have time to get used to the idea between now and then, if we know it will be an issue. On the other hand, if things end up not working out between us in that time (oh, god, I hate even thinking that), I am not sure what I would need to do in order to avoid those penalties without buying into his place.

So, despite all my internal drama in the last paragraph, this is not a human relations question. I'm already in therapy, Metafilter! This is really a question about the legal and financial issues at play here.

I think there used to be a thing where you had two years to buy a house after selling your primary residence or you had to pay big taxes on the proceeds, but a) I don't know if this is still the case, b) I don't know if I qualify since I only took 15% of the proceeds, c) I don't know if I qualify since I will be buying in on my boyfriend's property, and d) I don't even know if I have those facts right in the first place.

So, questions:
- If I wait to buy in on my boyfriend's property until mid-2013, how will my house sale proceeds be reported on my taxes in 2012? Will I be taxed on them as I would if it was income? How would it be different if I moved forward with investing in my boyfriend's property before the end of 2012?
- I have bought and sold two houses, but I have never been added to an existing title/mortgage. What is involved? I know it's complicated and that it's not cheap. I believe that the mortgage will be refinanced in this process, so it would be convenient to do this while the rates are low. Is that a reason to move forward before the end of 2012, or as soon as possible?
- I know legal marriage gets all kinds of rights and benefits that my ex-wife and I were not entitled to, but I really don't know anything about those rights or benefits. Does the process of legal marriage make any of this easier or moot? Obviously, I will not own any property that is not in my name, but maybe the process for retitling or whatever is easier in conjunction with legal marriage (like a name change is), and so waiting for that step to do this step might be prudent. However, we are not getting married until 2013, so that would have to be weighed against any tax implications.
- What if we split up and we don't go through with this? I don't believe we will, but if we did, I would then have proceeds and no house to put it in. How long would I have before I needed to reinvest the proceeds in real estate? Is that what I would need to do?

Basic overviews are fine. Let me know if you want more info.

You are not my Accountant, my Lawyer, my Doctor, or my Psychologist. I fully intend to discuss this with someone, but I'm already worried about it, and I don't even know if I should call a tax lawyer or accountant to discuss all the dirty details. Which would be better for this?

Thank you in advance!
posted by aabbbiee to Law & Government (10 answers total)
If you have lived in the house you just sold for 2 out of the last 5 years, you pay no taxes at all on the first $250k of your profit. (Note also that even if you did have to pay taxes, you didn't make $25k, you made $25k minus the amount you paid originally). There is no obligation to buy a new house soon. See this article (it was the first Google hit for "house sale taxes") for example.
posted by dfan at 1:09 PM on June 28, 2012 [5 favorites]

Yeah, if you've been talking to the older generation, they'll convince you that you have to be in a hot-hurry to reinvest the proceeds from your house sale. You used to have to declare the proceeds as capital gains, you don't have to do that any more.

So, just as dfan says, no biggie. Put your money in a CD, or some other interest bearing instrument and let it be for a while.

No comingling of funds or investing in your SO's house until you're married.

Done and done.
posted by Ruthless Bunny at 1:16 PM on June 28, 2012

I'd agree with waiting until you are married, since there's a chance that any investment you make in the house could be considered taxable income to him before you are married.
posted by chickenmagazine at 2:17 PM on June 28, 2012

My understanding: If you buy a house with the proceeds of this sale within 2 years, there is no tax event.

If you do not buy a house within two years, then your gain will go towards your lifetime $250K tax free property sales gain.
posted by Midnight Skulker at 3:02 PM on June 28, 2012

Midnight Skulker, I'm pretty sure that's incorrect. The only thing I can think of that comes close to those parameters are the 2 years it takes for 1031 income property exchange to be eligible to become a personal residence. There is no lifetime $250k tax free property sales gain. As I understand it, you are allowed to claim that exemption every two years, if you move that often.
posted by small_ruminant at 4:14 PM on June 28, 2012

Wait, you bought it with cash in 2006? Right before one of the biggest real estate crashes in history? If you sold it for less than you paid for it (I'm not an accountant) then you own nothing in taxes, which is a small mercy, I guess. There's a reason they call it capital *gains* tax.

Getting added to a mortgage is (from my thirdhand experience) very easy as the lender is only too happy to have another person on the hook for repayment. Getting added to the deed requires a little more effort, and you have to get it recorded.
posted by wnissen at 4:51 PM on June 28, 2012

Wait, you bought it with cash in 2006? Right before one of the biggest real estate crashes in history? If you sold it for less than you paid for it (I'm not an accountant) then you own nothing in taxes, which is a small mercy, I guess. There's a reason they call it capital *gains* tax.

The real estate boom and crash were far less dramatic in the middle of the country, except in places like Detroit where the metropolitan economy went well and truly haywire, so there's still the possibility of a capital gain. But if a loss was taken, capital losses can be deductible.
posted by akgerber at 5:48 PM on June 28, 2012

>I'd agree with waiting until you are married, since there's a chance that any investment you make in the house could be considered taxable income to him before you are married.

This makes no sense.
posted by yclipse at 5:59 PM on June 28, 2012

Response by poster: Yeah, we bought it for cash at the top of the market and sold for nearly $20,000 less than what we paid for it. We knew it would be a loss, and that's part of the reason why we didn't sell for so long after we'd split up. Yes, the market was better here than in other places, but we also got a perfectly terrible deal on the house itself.

So while we didn't have any capital gains, and in fact there were capital losses, I don't know how this works for me as I did not have a legal relationship with my ex-wife outside of the home ownership. I solely paid into a previous mortgage on another house, but she put up most of the cash for this home purchase. However, it was all my money, sweat, and tears that went into this house over the last few years, and it was not a small amount out of my pocket. That's why I took 15% of the home sale, which is roughly equivalent. It feels like I gained because I didn't have $25,000 in the bank when we bought this place, and now I do. How does that work, legally and tax-wise?

But now I really think I should talk to a tax professional. Would you all suggest I should talk to an accountant or a tax lawyer or would just a personal finance person do?

Thanks so far- I don't feel that there's any pressure to do anything rash or big before the end of 2012, and that's a relief.
posted by aabbbiee at 9:24 AM on June 29, 2012

The IRS does not allow for deduction of capital losses on a home, I do believe. So there is probably not much to pursue.

The tax professional you probably want to consult is a CPA.
posted by yclipse at 7:44 PM on June 29, 2012

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