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Tax Planning/Tax situation due to home sale

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Question
I am the sole proprietor of a small business. I have been in financial free fall since 2007. I lost all my credit at the same moment that my sales fell. Previous to 2007 I grossed about $150,000 per year and in 2013 I grossed $57,000. I have not showed any profit on my tax returns for the past 5 years. I have been managing to hang on but the giant stone around my neck is my home that I originally paid $625,000 for. My mortgage payments are $3768.00 month. (My mother, my husband and I were supposed to be paying for it, Mom died, husband & I split in 07 as well. He stuck me with the house.) Last year I rented out the entire house and moved in with my brother. Just recently the county where my house is located revalued my house and so I contacted my Realtor to see if I can actually get something from the sale. The Realtor thinks that I can clear somewhere between $65,000 - $80,000. I'm concerned about what that will do to my tax situation as well as capital gains. I want to buy a more affordable home in WI rather than CA for at the most $80,000 putting up to 60% to 80% down or paying it outright (I know I may not qualify for any kind of mortgage). I had thought that with the sale of your main residence you had a certain amount of time to reinvest a certain percentage of the profits in a new house before you had to pay capital gains. But everything I have read seems to be more involved with how long you lived in the house. I lived full time in the property since 97, in 2010 I started renting out part of the property and in Oct.2013 I moved out and got renters for the entire property. I am not sure if I will get hit with capital gains or income tax on part or all of the money if I reinvest it in a new house. Is there a percentage that you must spend on a new house? Is there a specific time period before taxes kick in? From what I read I think that anything I put into a new house would have all taxes deferred until I sold the new house and anything I did not put into the house would be subject to regular income tax. Is that correct?
   Also, if I were to consult a tax specialist about this should I see one in CA, where the house is or one in WI where I and my business are? Or does it matter?
Thanks in advance for any info you can give me.

Answer
I will try and address most of your concerns and I hope that it can give you some direction on where to go.

1. With the sale of your main residence, there is no certain amount of time to reinvest your profits.  You are likely thinking of a tax deferred exchange and this is not a tax-deferred exchange as you have described it.  Reinvesting in your new house is not a factor.

2. Will you actually make a profit.  How much did you pay for the house?  How much have you put into the house?  How much will you sell the house for?  Determining if there is even a gain will assist in knowing what is excludable.

3. There is a timing issue on when there is an exclusion depending on the number of months that you lived in the home as your primary residence for capital gains purposes.

It might be best to speak with someone who understands taxes in California.

If I can assist further, please let me know.

Tax Planning

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OWEN S. ARNOFF, EA

Expertise

As an Enrolled Agent, I am fully capable of providing tax advice as it relates to personal and business income taxes. Enrolled Agents are the only Federally licensed tax practitioners and are admitted to practice before all administrative functions of the IRS. My specialty is working with small business owners who file Schedule "C" and helping them to structure their business in such a way as to maximize as many tax advantages as possible. I also enjoy working with individuals who have both routine as well as complex tax situations. I prefer to concentrate on individuals and small business tax planning.

Experience

I have a 25 year background in financial services including tax, bookkeeping, insurance, real estate and securities. I was previously the Chief Financial Officer of a local and national franchise organization. I am currently semi-retired, but used to own (in partnership with another EA) an individual and small business financial engineering firm where I work with nearly 2,500 individuals and small business owners in nearly every state and almost every continent, assisting them in all aspects of their tax and financial well-being. I have prepared or reviewed more than 8,000 tax returns in my career.

Organizations
National Association of Tax Professionals

Publications
http://www.amazon.com/Owen-Arnoff/e/B00BLRIZNU/ref=ntt_dp_epwbk_2

Education/Credentials
Enrolled Agent, Admitted to Practice Before the IRS, Accredited Tax Preparer, Fellow of National Tax Practice Institute, Certified QuickBooks ProAdvisor (1999-2011), Sleeter Group Certified QuickBooks Consultant, Life & Disability Insurance Agent License (California, Texas, Maine), Real Estate Agent License (California); Many years of continuing education in all these fields.

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