Expert: liznarr - 1/15/2007

Question
My husband and I bought our 1st house in 2003.  In late 2005, we took out a home equity loan and did a big addition.  We sold the house in September 2006 and made $18k profit after paying mortgage/home equity loan back.
We used the profit to payoff vehicles, etc.  We purchased another house in September 2006 and are now again looking to sell.  We have only been in the house 3-4 months.  The profit was are estimating is between 20-25k after sellers fees and paying off mortgage.  Will we owe capital gains tax on anything that we have done so far?  If so, how much might it be, when would we owe it, and what are our options to re-invest in to avoid paying it?  We live in PA.
Thanks,
Karen

Answer
Hi Karen,

I apologize for the delay in responding.  With my real estate work load, I was simply unable to respond earlier.

I am not qualified to give you accounting/tax advice, but I am going to pass on to you my basic understanding of the capital gains tax which you should verify with your accountant or CPA.  You can also review this information at the IRS web site at the following link:  http://www.irs.gov/faqs/faq10.html  (Scroll down to the appropriate section for answers you need.)  In addition, you should also reference Publication 523 in the IRS link regarding the sale of your home.

If you meet ownership and use tests, you generally only need report the sale of your home if the GAIN exceeds a certain dollar amount.  The first IRS rule is that you must have both owned AND lived in the home as your main home for at least two or the past five years.

As I understand your question, your first home sale in September 2006 appears to qualify for the exclusion.  However, your second home purchase in September 2006 does not appear to qualify you for the capital gains exclusion since that was only four months ago, twenty months short of the required ownership/use period.  The IRS does grant an exclusion in certain cases such as qualified extended duty in the US Armed or Foreign Service.

If you sell your second home purchase in the year 2007, this would be reported for the 2007 tax year, the general deadline for which would be April 15, 2008.  As to the amount of tax that you might owe on any reported gain for that sale, your accountant/CPA would have to advise you on this since a number a variables would come into play.

Again, the information above is very basic, so please do consult with your accountant/CPA for any tax advice you plan to rely on.

After consulting with your accountant/CPA, keep in mind the IRS rules for any future purchases you make and plan to resell so that you can time your sales to take advantage of the IRS rules.  Also, be sure to check back with your accountant/CPA before any sale to make sure that there have not been changes in the capital gains tax that could affect you.

As stated on the IRS site (and under current law), “…With the exception of the 2-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of your principle residence so long as you meet the ownership and use tests.”

I hope the above is helpful in pointing you in the right direction.  Good luck to you, and feel free to write again if you have additional questions.

Regards,
Elizabeth