Q. I’m buying a retirement home but I plan to keep my regular house for a few years. What tax rules do I have to watch so I won’t owe as much in taxes when I finally sell?
— Getting out
A. It’s great that you’re asking ahead of time so you can plan.
Taxpayers who sell their primary residence may exclude $250,000 ($500,000 if married) of capital gain if the home was their primary residence for at least 24 of the last 60 months prior to the sale of the home, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.
This allows taxpayers like yourself to buy a retirement home and move their prior to selling your primary residence.
“If subsequently, the original primary residence is sold within three years from the date the new home was presumed to be your new primary residence, then the exclusion applies,” Hook said. “The date title transfers is the key date when determining whether the sale of the original primary residence occurred within 24 of the past 60 months.”
He said homeowners often think it’s the contract date that matters, but that’s incorrect, Hook said. Also, the purchase date of the new home has no bearing on the time limit, either. Instead, it is the date the new residence actually became your new primary residence, Hook said.
He offered this example:
A couple has lived in their current home in New Jersey for 25 years. Then they purchase a new home in Florida on Jan. 1, 2016. They use the home as a vacation home for a year and on Jan. 1, 2017, decide to move to Florida full-time and successfully establish Florida as their primary residence on that same date. If they sell their New Jersey home any time before Dec. 31, 2019 — the title transfer date — they will qualify to exclude $500,000 of gain on the sale of the New Jersey home.
There are a couple of other rules you need to follow to make sure you qualify, said Laurie Wolfe, a certified public accountant with Lassus Wherley in New Providence.
She said you must not have acquired the home through a like-kind exchange, you must not be subject to the expatriate tax and you must not have excluded a gain on a different home within the prior two years from the sale date.
Wolfe said there are certain instances where you won’t lose the exclusion if you don’t meet the ownership and use requirements.
“In these cases, the primary reason for the sale would be due to either a change in place of employment, health reasons or unforeseen circumstances,” she said. “If one of these exceptions is met, you may be allowed a reduced exclusion prorated to reflect the percentage of time that the tests are met.”
But, she said, because you indicate that the primary reason for the sale is to move to a new home, it doesn’t seem that those exceptions would apply.
If you time things right with your portfolio, you could realize other tax savings.
“Most people do not realize that if they do have a capital gain on the sale of their primary residence that they can offset tax losses from the sale of securities in their brokerage accounts against their capital gain on the sale of their home, thus reducing their taxes owed on the sale of their home,” Hook said.
For example if married taxpayers sell their home for $650,000, and the home originally cost $100,000, it results in a gain of $550,000. (Let’s leave capital improvements out of the calculation for simplicity’s sake.)
If they had lived in the house as their primary residence for 24 of the past 60 months, Hook said, they can exclude $500,000 of the $550,000 gain, which would still result in a $50,000 taxable gain.
“Prior to year end, if they sold brokerage investments for a realized loss of $50,000, then the taxable gain on the sale of their home of $50,000 would be offset by the $50,000, loss resulting in no tax on the sale of their home,” Hook said, noting that tax losses can only be taken on non-retirement assets and not from IRA or 401(k) accounts.
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