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Capital Gains Tax questions...

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BrandonSS
Frequent Contributor

Capital Gains Tax questions...

Hi all! 

 

I bought a foreclosure January 23, 2012 for a great price.  I've put a lot of work into renovating the house and now we are thinking about selling.  As it stands, after my last refinance (I swtiched from a FHA loan to a conventional), I can make around $55-60k on the sale of my house.  

Well, my fiance and I havent owned the property the full 2 years yet to use the exclusion.  However, we are wanting to move downtown and rent a place near my work and her school while she finishes.  I would like to immediately turn around and buy a smaller forclosure, flip it, etc, then again until she finishes school and we move out of state.

 

Now my question is... can I avoid capital gains in anyway?  By purchasing, say... a $100k foreclosure using a conventional loan and putting $20k down and the other funds into the reno; will this eliminate capital gains since I'm reinvesting immediately?  I'm really unclear on how the capital gains tax and its exclusions work.

 

Any help or advice would be greatly appreciated! 

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Message 1 of 10
9 REPLIES 9
HoldingOntoHope
Valued Contributor

Re: Capital Gains Tax questions...

I would think that you would get much more reliable advice from a tax professional than from an internet forum in this case since your questions are tax specific. You are also going to need advice on not just federal but state tax laws. With the amount of money involved and the possible tax consequences a consultation fee to a local CPA would be a bargain.

Best financial advice I ever got: "Just imagine what an adult would do and do that."

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Message 2 of 10
BrandonSS
Frequent Contributor

Re: Capital Gains Tax questions...


@HoldingOntoHope wrote:

I would think that you would get much more reliable advice from a tax professional than from an internet forum in this case since your questions are tax specific. You are also going to need advice on not just federal but state tax laws. With the amount of money involved and the possible tax consequences a consultation fee to a local CPA would be a bargain.


I think you may be surprsised who ventures into these forums Smiley Happy  I've had some stellar legal help from attorneys on here, even made a few networking connections.  If time comes that i dont receive a educated answer, then yes obviously I will go that direction.  Even if i do receive advice I always double check the information. 

3/2010 - EX 555 (FAKO) EQ 542 TU 548
GOAL: 680+
Goal exceeded! - EQ - 712 TU - 701
2/2015 - 750+ across the board!
Message 3 of 10
HoldingOntoHope
Valued Contributor

Re: Capital Gains Tax questions...

Good to know. Although I have been told that you can't post anything on the Internet that isn't true.Smiley Very Happy

Best financial advice I ever got: "Just imagine what an adult would do and do that."

Starting Score: 500's
Current Score: EQ 701 (FICO) TU 721 (FICO) EX 715 (Quizzle)
Goal Score: 760 ALL


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Message 4 of 10
BrandonSS
Frequent Contributor

Re: Capital Gains Tax questions...


@HoldingOntoHope wrote:

Good to know. Although I have been told that you can't post anything on the Internet that isn't true.Smiley Very Happy


haha always double and triple check the advice  Smiley Very Happy

3/2010 - EX 555 (FAKO) EQ 542 TU 548
GOAL: 680+
Goal exceeded! - EQ - 712 TU - 701
2/2015 - 750+ across the board!
Message 5 of 10
tooleman694
Valued Contributor

Re: Capital Gains Tax questions...

You need to make a ton more money on the house to worry about capital gains. People selling homes in the millions get hit by it.

Message 6 of 10
Elcid89
Contributor

Re: Capital Gains Tax questions...


@BrandonSS wrote:

Hi all! 

 

I bought a foreclosure January 23, 2012 for a great price.  I've put a lot of work into renovating the house and now we are thinking about selling.  As it stands, after my last refinance (I swtiched from a FHA loan to a conventional), I can make around $55-60k on the sale of my house.  

Well, my fiance and I havent owned the property the full 2 years yet to use the exclusion.  However, we are wanting to move downtown and rent a place near my work and her school while she finishes.  I would like to immediately turn around and buy a smaller forclosure, flip it, etc, then again until she finishes school and we move out of state.

 

Now my question is... can I avoid capital gains in anyway?  By purchasing, say... a $100k foreclosure using a conventional loan and putting $20k down and the other funds into the reno; will this eliminate capital gains since I'm reinvesting immediately?  I'm really unclear on how the capital gains tax and its exclusions work.

 

Any help or advice would be greatly appreciated! 


No. Your capital gain is calculated on your basis in the property. Rolling the profits from one sale into another purchase doesn't exempt the fact that the reused funds represent a taxable gain. You don;t meet the terms for a Section 121 exclusion, so you owe CG taxes if you choose to sell.

 

Best advice is to rent the property out, build equity with someone else's money and then move back later on for enough time to satisfy your 2 year limitation. The 2 years doesn't have to be consecutive. It is a cumulative 2 years out of the 5 years preceding (and including) the year of sale

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Message 7 of 10
Mike_B03
Valued Contributor

Re: Capital Gains Tax questions...


@tooleman694 wrote:

You need to make a ton more money on the house to worry about capital gains. People selling homes in the millions get hit by it.


Where did you hear that? Capital Gains Tax hits everyone on income property.

Message 8 of 10
Elcid89
Contributor

Re: Capital Gains Tax questions...


@tooleman694 wrote:

You need to make a ton more money on the house to worry about capital gains. People selling homes in the millions get hit by it.


Incorrect. ANY gain on the sale of property is taxable as a capital gain, UNLESS you meet the terms (both ownership and use) for a Section 121 exclusion ($250,000 single, $500,000 married joint ownership).

 

There are rules under which you can claim a partial exclusion when you have lived in the property less than 2 years, but that only applies to job changes, documented health concerns with the property or unforeseen circumstances (things ilke natural disasters, divorce, etc.). Even then you only get a pro-rated exclusion, and it is a great way to ask the IRS for an audit.

 

About the only way around that is a Section 1031 like-kind exchange, which involves investment property.

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Message 9 of 10
CrBuilder
Established Member

Re: Capital Gains Tax questions...

I have to concur with Eicid on this one. You have to reside for the full 2 years to take advantage (the 2/5 rule) and th exludable amount would be as mentioned $250K SIN/$500K MAR. You would hit with CG dependant on the adjusted basis after renovation. 

 

If your plan is buying houses and flipping them, best suggestion is formation of an LLC, has great tax advantage. 

 

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