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Primary Home Sale Cap Gains
Old 04-11-2021, 09:11 PM   #1
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Primary Home Sale Cap Gains

Hello fellow FI seekers.
I have a question for those who have sold your primary residence for a profit. We are in a position to FIRE inside of 3 years when my wife will have served for 20 years at her hospital. The plan remains to move to a much LCOL area and to sell this house. In meeting with a Realtor early this week for a consult, we were informed that our home is worth about 2.5 what we originally paid for it 17 years ago. We realize real estate prices are super inflated in our region due to the pandemic and want to sell now and rent for the remaining 3 years to take advantage of the crazy housing market we find ourselves in yet again. Immediately my mind goes to Cap Gains. I read about Rule 121 of the IRS tax code. Originally paid $220, agent suggests we list at $529 but he feels that it will generate a bidding war since our property is 5 minute walk to train and 2 minutes to bus.
Question is, who here has gone through something similar ? Will the gains be deemed income, or is it REALLY tax free at 500k if MFJ? Iím not a fan of IRS audits or inquiries of any sort.
Thanks in advance.
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Old 04-11-2021, 09:23 PM   #2
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Originally Posted by katwillny View Post
Hello fellow FI seekers.
I have a question for those who have sold your primary residence for a profit. We are in a position to FIRE inside of 3 years when my wife will have served for 20 years at her hospital. The plan remains to move to a much LCOL area and to sell this house. In meeting with a Realtor early this week for a consult, we were informed that our home is worth about 2.5 what we originally paid for it 17 years ago. We realize real estate prices are super inflated in our region due to the pandemic and want to sell now and rent for the remaining 3 years to take advantage of the crazy housing market we find ourselves in yet again. Immediately my mind goes to Cap Gains. I read about Rule 121 of the IRS tax code. Originally paid $220, agent suggests we list at $529 but he feels that it will generate a bidding war since our property is 5 minute walk to train and 2 minutes to bus.
Question is, who here has gone through something similar ? Will the gains be deemed income, or is it REALLY tax free at 500k if MFJ? Iím not a fan of IRS audits or inquiries of any sort.
Thanks in advance.
Have you actually looked at what an acceptable rental will cost you? If you are going to buy another house I'd just stay in the housing market. And where will you park this huge gain while you wait to buy another home. Have you really thought about this? IMO you are focusing on the wrong thing. Figure everything else out before you worry about taxes
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Old 04-11-2021, 09:23 PM   #3
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Yes, married filing jointly gets a $500K exclusion for your primary home.
https://www.irs.gov/taxtopics/tc701
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Old 04-11-2021, 09:32 PM   #4
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Have you actually looked at what an acceptable rental will cost you? If you are going to buy another house I'd just stay in the housing market. And where will you park this huge gain while you wait to buy another home. Have you really thought about this? IMO you are focusing on the wrong thing. Figure everything else out before you worry about taxes
Thanks for the reply. Yes, i have considered and looked where i will be renting for the next 3 years. Well though out and planned actually, I just didnt mention it on this post since that is not a point of worry. Nor is where I will be parking the profit. My actual concern was-is the taxes i may incur as a result of the capital gains. First time selling a home, thus the implication question. Thanks again, your insight is appreciated.
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Old 04-11-2021, 09:33 PM   #5
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You may still be on the hook for state taxes on the gains though, depending on what state you live in.
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Old 04-11-2021, 09:34 PM   #6
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You may still be on the hook for state taxes on the gains though, depending on what state you live in.
Thanks, i will need to look into this. I am in NY state.
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Old 04-11-2021, 10:21 PM   #7
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Yes, married filing jointly gets a $500K exclusion for your primary home.
https://www.irs.gov/taxtopics/tc701
Yes, marrieds filing joint get to exclude the $500,000 gain.

And remember to include in your basis not only what you originally paid for the house, but also cost of any improvements over your ownership period. Add a new deck, a new patio, replace windows, new carpets, landscaping project? Add the costs to your basis--reduces your gain.
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Old 04-11-2021, 11:35 PM   #8
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Originally Posted by RetireeRobert View Post
Yes, marrieds filing joint get to exclude the $500,000 gain.

And remember to include in your basis not only what you originally paid for the house, but also cost of any improvements over your ownership period. Add a new deck, a new patio, replace windows, new carpets, landscaping project? Add the costs to your basis--reduces your gain.
Yes, we took advantage of the $500K exclusion. We didn't need the entire amount, but it was up there. Ours was slightly complicated as the residence had been a rental for a while (we DID live in it for the 2 years required before sale.) So there was depreciation recapture, but all handled by the accountant. Not a problem but YMMV.
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Old 04-12-2021, 07:20 AM   #9
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Yes, marrieds filing joint get to exclude the $500,000 gain.

And remember to include in your basis not only what you originally paid for the house, but also cost of any improvements over your ownership period. Add a new deck, a new patio, replace windows, new carpets, landscaping project? Add the costs to your basis--reduces your gain.
Yes Indeed. Great point. Much has been done over the course of 17 years of ownership.
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Old 04-12-2021, 07:32 AM   #10
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Yes Indeed. Great point. Much has been done over the course of 17 years of ownership.
But unless you are going to get over $720K you don't have to worry about this, right? There's no carry over of unused exclusion for this.
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Old 04-12-2021, 07:59 AM   #11
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Can anyone tell me how to handle the following after selling my home,
Purchased 12 years ago for $500,000, sold last month for $670,000, profit was split
between me and my partner with proceeds of $335,000 each towards IRS.
I am currently retired with an income of $14,000 all from IRA distributions.
I can stop the distributions if need be.
Please advise.
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Old 04-12-2021, 08:23 AM   #12
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thanks for posting, DW and I were just discussing this very topic
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Old 04-12-2021, 08:38 AM   #13
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Thanks for the reply. Yes, i have considered and looked where i will be renting for the next 3 years. Well though out and planned actually, I just didnt mention it on this post since that is not a point of worry. Nor is where I will be parking the profit. My actual concern was-is the taxes i may incur as a result of the capital gains. First time selling a home, thus the implication question. Thanks again, your insight is appreciated.

Fair enough and you never said if your house was paid off, so you'd have less money to worry about parking somewhere.


I'm really curious about your thinking on this decision, but if you don't care to share that's fine too. Most people here would not follow your path and it's good to be challenged by someone who thinks a little differently.


I'm a bit of a worrier and the hassle of moving to somewhere rented , the possibility of continually rising home prices, not having a safe place to park money short term with any decent return, along with a few others would make this a non starter for me.



Good luck...
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Old 04-12-2021, 08:47 AM   #14
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Originally Posted by cyclegirl View Post
Can anyone tell me how to handle the following after selling my home,
Purchased 12 years ago for $500,000, sold last month for $670,000, profit was split
between me and my partner with proceeds of $335,000 each towards IRS.
I am currently retired with an income of $14,000 all from IRA distributions.
I can stop the distributions if need be.
Please advise.
Assuming you and your partner are not married and you each had a $250K basis in the property, your long-term capital gain is at most $335K-$250K = $85K. It's probably less because you can subtract the cost of any permanent home improvements and your selling expenses to calculate your actual gain.

If you lived in the house for two out of the past five years and never rented it out during the time you owned it and haven't sold another home during the past two years, then you can exclude the full amount of the gain because it is less than $250K (if you used it as a rental and then moved back into it, then it's more complicated). If you do not receive a form 1099-S, then there is no requirement to report this gain on your tax return. If you do receive a 1099-S, then you will fill out forms 8949 and Schedule D on your tax return next year, but you will pay no taxes on the gain.
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Old 04-12-2021, 08:56 AM   #15
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Fair enough and you never said if your house was paid off, so you'd have less money to worry about parking somewhere.


I'm really curious about your thinking on this decision, but if you don't care to share that's fine too. Most people here would not follow your path and it's good to be challenged by someone who thinks a little differently.


I'm a bit of a worrier and the hassle of moving to somewhere rented , the possibility of continually rising home prices, not having a safe place to park money short term with any decent return, along with a few others would make this a non starter for me.



Good luck...
Hi ivinsfan,
Long Story actually so I will try to condense it. Both kids are grown and out of the house, youngest is actually finishing college this May, the oldest is working on her Masters.
I was born overseas and the plan has always been to return home when the children are out of the house and on their way with their lives. In 3 years which is when we plan to make the move back to my home country, those things, meaning their careers should have been started and on their way. At that same time, my wife would have made 20 years at her hospital which means she qualfies for her full pension at 55 (we would be 50 in 3 years). We cash flowed the build of a house in my home country over the past 2 years and its ready for us. In fact, we have stayed there for 2-4 weeks at a time over the past few years as our employers would allow. I can work remote and did that for 4 weeks recently. To your original question.
We want to sell now and take advantage of the market as we are not certain if this will continue or if there will be a price correction. Our home should NOT be selling for this much, this market and town does not support such high prices. Not even leading up to the 08 prices did this town support those prices. So we will sell, rent closer to my wives' hospital. REntal market in the area will be roughly $500 less than what we pay in mortgage today, plus no maintenance as we find ourselves having to do on this 30 year old house.
The house is not paid off as we are 17 years into a 30 year mortgage. the only refinance we did was to lower interest, the term remained the same. We should have done a 15 year term when we did refinanced some 10 years ago but at the time we could not have done it financially. or at least we thought.
Thanks for your insight. I appreciate you taking the time to reply.
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Old 04-12-2021, 08:59 AM   #16
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Having both homes is huge, makes a big difference.. so basically your only risk here is sellers remorse if prices continue to rise, which might be annoying, but isn't really going to make a difference in your life going forward.


Thanks for answering my question!
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Old 04-12-2021, 09:01 AM   #17
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Having both homes is huge, makes a big difference.. so basically your only risk here is sellers remorse if prices continue to rise, which might be annoying, but isn't really going to make a difference in your life going forward.


Thanks for answering my question!
ivinsfan,
pretty much sums it up. We are ok with loosing out on the potential gains we may incur in the next 3 yeas, however, alternatively, we would kick ourselves if the market tanks, as it has in this area in years past.
Thanks again for the insight. Great discussion.
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Old 04-12-2021, 09:38 AM   #18
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If you do not receive a form 1099-S, then there is no requirement to report this gain on your tax return.
If the house does not qualify as your primary residence, then you have to report the gain whether or not you receive 1099-S. I ran into this for just this past tax year since the sale was for under $250K and it seemed very clear to me that I still had to report it.
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Old 04-12-2021, 07:52 PM   #19
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why dont you list at $720k and live there until hit. list at 529k and create bid work, rather go high and come down.

As realtor, they dont care how much you make profit. they sometimes go too low to sell for their commission.

did you contract with the agent? try who value your house more.
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Old 04-12-2021, 07:59 PM   #20
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[QUOTE=retire to nature;2591013]why dont you list at $720k and live there until hit. list at 529k and create bid work, rather go high and come down. /QUOTE]

Bad idea.

Obviously overpriced houses will not draw bidders. They may think seller wants the "over" priced amount and is also expecting it to "bid" even higher----no buyers will even waste their time.

Then it sits, and sits, and sits, and even, maybe "especially" in this hot market, people think "what is wrong with that house"? it creates its own stigma.

List at "fair value" price, or a bit under, "that" creates the bidding wars and draws all the interest. And you end up with higher sales price then maybe you thought possible.
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