The Three Key Time Frames of Selling Your Home

By Randall S. van Reken, DREI, EA, ATP, CFP

Eight years ago Congress gave us a fantastic tax break when selling our own homes. If you owned and occupied your home for 2 of the 5 years prior to selling, up to $250,000 could be taken as a tax-free profit. It was double that or $500,000 for most married couples.

We have had a rapidly appreciating real estate market in recent years as we all know. Many people have five digit (or even six digit) profits built-in by time they close on a new home. As a result, people are buying and re-selling their homes in record time; often within just a few months of purchase. This suddenly causes great concern from the tax angle. Back when the average home owner stayed 7-10 years in the same house, and it often took several years just to break even after selling expenses, this was simply not much of a concern.

Let’s review from best to worst the three key time frames relevant when selling your home from the income tax viewpoint.

The Best Situation:

• Requirement: Own and occupy your home for 2 years (730 days) out of the previous 5 years before the closing date.
• Benefit: Up to a $250,000 tax free profit. $500,000 tax free profit for a married couple filing jointly provided either of them owned it, and both of them occupied it, for 2 out of 5 years. Any profit over that amount (we should all be so lucky) is taxed at 15% under current law.

The Not-So-Bad Situation:

• Requirement: You don’t hold it for the required 2 years as above, but you DO hold it for at least one year and a day. There are some possible partial exclusion situations which are not discussed here.
• Benefit: This is considered a long-term capital gain eligible for a lower tax rate. The profit is taxed at a maximum rate of 15% (and possibly as low as 5%) rather than your regular tax bracket (as high as 35%). Additionally, if you have capital losses from stocks or other investments this can lower the taxable gain.
• Trap: While 15% is not so bad, a large gain can cause other items of income to become taxable and/or other deductions to be reduced.

The Lousy Situation:

• Requirement: You don’t hold it for even one year before selling it and don’t qualify for any partial exclusion.
• Trap: This is a short-term capital gain and receives no beneficial tax rate unlike its long-term cousin. The profit will be taxed at your regular bracket and can cause you to climb into higher brackets (up to 35%). And like its long-term cousin, a large gain can cause other items of income to become taxable and/or other deductions to be reduced. The only positive is if you have capital losses from stocks or other investments this can lower the taxable gain as well.

Other Facts and Myths:

• Buying Another Home: The old “rollover” concept of buying another home has absolutely nothing to do with selling your personal home and the tax consequences any longer. This rule was removed in 1997. Note: Investment property does have an exchange possibility that your personal residence does not have.
• What is Profit? Showing the profit on a tax return involves two numbers in summary. The gross sales price and the “cost.” The cost consists not only of the original cost but also: purchase closing costs, improvements, selling expenses and concessions, closing costs on the sale and some other items. Many people forget some of these items and just look at a price to price comparison. In any taxable sale, these other items are critical in lowering your tax.

© Copyright 2005, by Randall S. van Reken. All rights reserved.

Bio for Randall S. van Reken, DREI, EA, ATP, CFP
Randall S. van Reken is the owner of the Tax Man, Inc., a tax preparation service. Randy is an Enrolled Agent, specially enrolled to practice before the Internal Revenue Service. He is also a certified financial planner and an accredited tax professional. Randy currently prepares over 1,200 tax returns each year including individual, partnership, corporation, S corporation, fiduciary, and LLC returns at the federal level and over 30 states.

Randall is only tax person I recommend to my clients.  You can reach him at the following phone numbers, by email or through his website.

Tax Man, Inc.
3441 West Sahara - Suite B7
Las Vegas, Nevada 89102
702-364-2520
Fax 702-413-7885
rvanreken@earthlink.net
www.taxmaninc.com

Eric Fernwood
702-358-8884
EricFernwood@Gmail.com