Can I Avoid Capital Gains on Sale of Second Home?

[calico1597]

We bought a winter home in 2017 for $185K. Last spring we sold that home for $227K and purchased another for $371K. At the closing of first home we were given a 1099S for capital gains. Are we going to have to pay capital gains since we used the profits on that house to purchase another winter home? The closings were three days apart.

I've misplaced the 1099S but have the closing statements.

 

[audreyh1]

We bought a winter home in 2017 for $185K. Last spring we sold that home for $227K and purchased another for $371K. At the closing of first home we were given a 1099S for capital gains. Are we going to have to pay capital gains since we used the profits on that house to purchase another winter home? The closings were three days apart.

I've misplaced the 1099S but have the closing statements.

If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.

https://www.irs.gov/taxtopics/tc701

It has nothing to do with buying another house.

I'm sure you can get another copy of the 1099S. You do have to declare it.

 

[pb4uski]

See https://www.irs.gov/taxtopics/tc701

If you used it as your principal residence for 2 of the 5 years prior to the sale and haven't excluded a gain in the last two years then any gain would be excluded from tax.

If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets. Topic No. 409 covers general capital gain and loss information.

Qualifying for the Exclusion

In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.

Way back when if you sold your principal residence and bought a different principal residence that cost at least as much as what you sold your old one for then the gain would be deferred... but they changed/simplified that a long time ago.

 

[calico1597]

We lived in the house about 11 months during the two years of ownership. We have a primary home in another state.

 

[calico1597]

Wouldn't this qualify for a 1031 like kind exchange?

 

[GreenEggs]

Wouldn't this qualify for a 1031 like kind exchange?

 

[Ronstar]

We sold a 2nd home in June, 2019. Then we were looking to purchase a new 2nd home. I asked our CPA if we could do a 1031 exchange. He said that a 1031 exchange has to be declared before the closing of the sale of the first home. He calculated roughly what our tax would be and I sent estimated payments for state and federal taxes.

So I suspect that OP’s sale of their 2nd home is subject to capital gains tax.

 

[Scrapr]

We sold a 2nd home in June, 2019. Then we were looking to purchase a new 2nd home. I asked our CPA if we could do a 1031 exchange. He said that a 1031 exchange has to be declared before the closing of the sale of the first home. He calculated roughly what our tax would be and I sent estimated payments for state and federal taxes.

So I suspect that OP’s sale of their 2nd home is subject to capital gains tax.

and an intermediary has to hold the funds, then disburse those funds on the purchase. It's not super complicated but there are a lot of rules

a local 1031 intermediary got caught using the escrow funds for their own development projects. Then the Great Recession came and as [-]Jimmy[/-] Warren Buffet says You find out who is swimming naked

 

[BeachOrCity]

The only thing I think you can do at this point is DEFER the gain by investing it in an opportunity zone. Just the gain or part of the gain needs to be invested.
You need to do this within 180 days from closing.
Then the gain will be deferred until 2026
They will tax the gain in 2026 at 10 percent less basis wise
The opportunity zone if held 10 years will be tax fee gains when you sell.

 

[ILikeStarTrek]

Like other posters have said, OP has already lost the chance to do a 1031 exchange by waiting almost a year after the property was sold to ask whether the capital gains can be avoided. The 1031 exchange would have needed to be initiated before closing on the sale.

However...

The only thing I think you can do at this point is DEFER the gain by investing it in an opportunity zone. Just the gain or part of the gain needs to be invested.
You need to do this within 180 days from closing.

I'm not an expert on opportunity zones, but according to this page:
https://fundrise.com/education/blog-posts/how-to-roll-over-a-capital-gain-into-an-opportunity-fund

"The 180-day window would begin on the last day of the taxable year" when the property was sold (not the day of closing). So even though OP says the property was sold last spring, this should still be possible.

It also says IRS form 8949 needs to be filed to indicate the capital gains have been invested in an opportunity zone. If OP does want to invest the gains in an opportunity zone, OP should probably involve an income tax professional when filing 2019 taxes to make sure the paperwork is done properly.

 

[mrfeh]

Are we going to have to pay capital gains since we used the profits on that house to purchase another winter home?

Yes. What you used the gains for is not relevant.

 

[cathy63]

We bought a winter home in 2017 for $185K. Last spring we sold that home for $227K and purchased another for $371K. At the closing of first home we were given a 1099S for capital gains. Are we going to have to pay capital gains since we used the profits on that house to purchase another winter home? The closings were three days apart.

I've misplaced the 1099S but have the closing statements.

Before expending too much effort avoiding the tax, it's worth figuring out how much you would actually owe if the entire gain is taxable.

Your gain is ($227K - selling expenses) - ($185K + basis adjustments). Selling expenses include things like your real estate agent's commission, which could be $13.62K if you paid 6%. Basis adjustments include your closing costs from the original purchase and improvements you made while you owned the property. So if you just look at purchase price and sales price, you might be thinking $42K, but the actual gain on which you'd be taxed might be more like $25K.

How much tax you'd owe on $25K depends on your other income, but very roughly and assuming you are married filing jointly, if your other income is under $78K, then you owe $0 for the cap gain. If you're still working or have other significant investment income, then you'll owe 15% or 18.8% depending on whether you're over the NIIT threshold.

 

[RE2Boys]

Keep in mind state taxes. If the property was in a state different from your primary resident state, the gain would be reported on both state tax returns. You may need to file a non-resident state income tax return for the state where the property is situated. Many states will withhold some state taxes at closing when the seller is a non-resident of that state. I know NY does, possibly PA and others). Of course the gain would be reportable on your resident state income tax return. However, your resident state should grant you some credit if you had to pay taxes to a the non-resident state.