How To Legally Avoid Paying Taxes On Home Sales ?

OK here’s the situation. I am interested in moving back to the other side of the state (MO) in a year or two and am trying to figure out how to make the most $$ of the properties I have here. I have read on this forum that I need to hold onto property at least one year and a day to avoid long term capital gains. I can do that on some of my newer properties if needed. I have also heard/read about selling your home and not having to pay taxes on the income. Something about living in the property for at least 2 of the last 5 years. Can someone give me guidance on where I can read about this. My thought is, if this strategy is correct, then I can move into my rental house next door, start my two year residency there, put my present home up for sale and if it takes some time then I would have already been in the second house part of the two year time frame. Could I rent my present home for a year before trying to sell it - then I would only have one year left on the two year time frame of staying in the rental house next door. If I did this then I can possible see selling two houses in two years without having to pay taxes on them. Someone give me some guidance please. This might not be the correct forum for this sort of question so please feel free to PM me if you have suggestions. As I read the other - jail time and $5.00 a day is not an option Thanks for your help

I hope what you read at this site is that the sale of property held at least a year and a day qualify for long term capital gains tax treatment (not avoid it).

If you have both owned and occupied your primary residence two of the five years prior to sale, then the first $250K in sale profit per taxpayer is tax free. You can only take the tax free gain once in a two year period. If you sell your primary residence and take the tax free profit, you can't do it again until two years has elapsed.

Yes, you can convert your rental property into your primary residence, occupy it for two years, then sell it tax free, or nearly so. You will still have to pay the tax on unrecaptured depreciattion, but the profit from appreciation (up to $250K per taxpayer) will still be tax free if you satisfy the two year rules. There is no limit on the number of times you can take tthe capital gains exclusion on the sale of your primary residence -- you just can't do it more than once in a two year period.

You can sell one now, move into the other for two years, then sell the second one- gaining up to $250,000 per taxpayer of appreciation tax free on each one. If your wife or co-owner does the same, that is a million dollars of tax free appreciation in two years. All you need are two properties that have appreciated that much...

Chris

Hello all,

I had a similar question to haynesm which you have just answered.
Yesterday, we were informed by an agent that we could have two primary residences; one each as husband and wife and would not have to live in each seperately- only receive our mail at our respective homes so we could qulify for the capital gains treatment. Wouldn't that be illegal? Thanks for your insight.

Karin

Karin,

I hope you are not taking tax advice from this agent. If so, be prepared for a big surprise when you get audited.

Yes, spouses who live apart can each have their own primary residence. Your agent is ignoring half of the two year rule -- not only must you own the property, you must physically occupy the property as your primary residence for two of the five years prior to sale to qualify for the capital gains exclusion. Just using the property as a mail drop does not pass muster with the IRS.

Take your tax advice from a licensed tax professional -- someone you can hold liable if their advice is wrong.

For first hand info and to read to your hearts content go to http://www.irs.gov slash publications slash p523 slash index. I then went to the FAQ number 10 Capital Gains losses and sale of home.

Following are some excerpts from the irs publication 523
To claim the exclusion, you must meet the ownership and use tests. This means that 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).
The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous.
Here is the link but not sure I can post it http://www.irs.gov/publications/p523/index.html

Both NewKidinTown3 and Chris have done a fine job of answering our questions. I’m just one of them guys who also like to read more.

This is a GREAT site

haynesm,

Make sure you fully understand the full meaning of "occupy as your primary residence".

Let's say you have a summer home in Florida that you occupy 5 months every year. Your "winter" home is in Vermont which you occupy the rest of the time. Each year for five years you spend five months in your Florida home.

In your fifth year of occupying your Florida home, you decide you don't like the high cost of homeowners insurance any more and put the house up for sale. Just when you are ready to move back to VT, you accept an offer to purchase your FL home.

Looking back over the five years prior to the sale, you calculate that you owned the house the entire time and physically occupied the property an aggregate of 25 months. You claim the capital gains exclusion on the sale of your property.

The IRS disallows the capital gains exclusion and gives you a bill for the capital gains due on the sale of your property. You argue that you met the two of five year tests. The IRS disagrees because you did not occupy the FL home as your "primary" residence at any time during the five years prior to the sale. The IRS asserts that since you spent most of the year, each year, in your VT property, the VT property is your primary residence and remained so while you were in FL. The FL home was simply a second home the entire time, up to the time you sold it. Your profit on the sale of your second home is not eligible for the capital gains exclusion.