[Austyn]

Wondering if anyone knows the for dummies version of capital Gains.

We are slotted to net 150k on a house we’ve only owned a year.

We planned to stay there 2 or many more but unexpectedly had to move.

My accountant is being pretty dry with me. Saying there’s no way to avoid it.

When I pressed for more info she reluctantly gave a few ways.

We’re talking 22k in taxes here.

I don’t want to just give that up Willy Nilly.

I explained that I’ve been told if you put the proceeds into a new house you avoid the taxes.

She said that’s not true. Idk how that’s possible.

I’ve heard it so many times.

I think I’ll get a new accountant who takes my taxes more seriously but in the mean time I’m trying to figure out what to do.

Renting it isn’t an option.

I really need the money so selling it is my preferred choice.

I also would like to pocket some or most and put it into savings for a future house as I’m not ready to buy just yet.

[Frank]

Your accountant is correct. You are thinking of a rule that only applies to rental properties called a 1031 exchange.

There are a few ways to involve a residence, but they don’t seem to apply to you.

Make sure you do your closing over one year from purchase.

Do you have any capital losses you can harvest from other investments?

[Bill]

What was the reason for the unexpected move? If it was for a job or health reasons, there are exceptions.

If you just changed your mind, your account is correct.

Also, come on man.

You lucked into a $150k gain in one year!

Take the win.

No matter what happens, you are coming out way ahead here.

[Rick]

Are you thinking of 1031 Exchange? If so, your accountant is right and this is not applicable to primary residence homes.

[Joel]

This used to be a thing for the sale of private residences, but Congress took it away in 1997 and replaced it with a version of the current rule where a certain amount of capital gains is tax exempt if you have lived in the property at least 24 months out of the past 5 years.

The old rule hasn’t been a thing for almost 30 years and I hear people repeat this thought as if it were fact at least a half a dozen times a year.

Investment properties can do something similar through a 1031 exchange.

But unless you turn your home into a rental property, you don’t have that option.

Plus, I believe there are issues with how long the property must have been held as an investment property before this becomes an option.

If you’ve already sold your house, this is not an option.

You describe this person as your accountant. As such, they are just reacting to the moves you make.

Usually accountants and tax preparers are not responsible, nor are they prepared to plan your tax moves for you in advance.

Even CPAs may struggle with this if they don’t know all of your financial situation in advance.

So I think you blaming your tax liability on your accountant is a bit childish.

You could seek the advice of a CPA or CFP that does tax planning to help, but given the constraints you give, I’m not sure that will make a big difference.

One thing that will help reduce your tax bill is to make use of your available tax shelters.

If you have not maximized all of your pre-tax retirement contribution options, you should do so now.

Money is fungible, so you can live off of the expected proceeds of the home sale.

Or you could even borrow in order to fund contributions ahead of the sale.

Such options are usually 401(k), Traditional IRA and HSA contributions.

If you are self-employed, there may be additional opportunities to defer taxes.

Why shelter ordinary income from taxes? Doesn’t long-term capital gains all get taxed at 15%?

No, it doesn’t. Long-term capital gains are stacked on top of all your income that is taxed at ordinary income tax rates.

Given that you have ordinary income and are expecting $150,000 in long-term capital gains from the sale of this house, you may wind up paying NIIT – a 3.8% additional tax on investment income used to help pay for ACA premium tax credits.

By reducing your ordinary income, you can avoid some NIIT taxes.

What’s more, if your ordinary income is in the 22% tax bracket, some of your long-term capital gains will be taxed at 0%.

Reducing how much is in the 22% bracket will actually increase how much of your long-term capital gains are taxed at 0%!

So yes, there are ways to reduce your tax burden on the sale of this house.

[Natalie]

Tax Pro here-and I’m actually an expert on specifically this topic:

There are exclusions in 121 that allow for a reduced maximum exclusion.

The broad oversight of it is any “unforeseen circumstance”.

Not moving for a reason that could have been reasonably anticipated happening.

If you’d occupied it 1/2 years and are single you’d qualify for $125k of maximum exclusion vs. the $250k (you met 1/2 the requirement).

There is also a lookback to your most recent 121 exclusion you used previously as well (so if you last sold a primary home 4 months ago the reduced exclusion would be even smaller).

There is no requirement or item related to putting the funds into a new house (that related to primary homes 20+years ago, not any longer)

[Michael]

If this is a primary residence and you’ve lived there under two years there are a few exclusions- mainly dealing with work or health related circumstances.

You don’t mention the circumstances or the location of the move, which matter a great deal in this instance.

I’d suspect your accountant is quite familiar with those however.

[Scott]

If the house was your primary residence you have a $250k/$500k capital gain exclusion (single/MFJ) if the home was your primary residence for 2 of the last 5 years.

The roll-your-gain strategy for a primary residence was expunged from the tax code many years ago it was replaced by this new rule.

[Stef]

It’s not true, it used to be true a long time ago but it’s no longer true.

But I think it’s a good idea to talk to another tax professional since you seem to be doubting yours.

[Kirstin]

People were thinking of the old capital gains tax rules that were changed in 1997.

Like my parents who didn’t know the current rules around this since the last time they sold a house was 1988.

The current rules are actually much more flexible than the old ones.

[Gina]

Real estate broker here: Proceeds to a new home to avoid taxes went out the window late 80s/90s

There are some exceptions….

See irs guidelines.

You could turn it into a rental and then eventually 1031 exchange it into another rental to defer taxes.

Otherwise, you are paying cap gains.

[Audrey]

Depending on the reason you moved, you may be able to pro rate the exemption amount.

If this is a rental property or 2nd home, the cap gains exemption doesn’t apply and you are put of luck for a 1031 if you already took the cash.

[Rachael]

Tax loss harvesting if you have any losses? This is pretty much your only way to avoid unfortunately.

[Kris]

Your CPA is correct. What you are referring to is a VERY old tax law.

[Sarah]

Accountant is correct. 1031 exchange is not for primary. If you sell the taxes are completely unavoidable.

The o my way to avoid them would be to keep it and turn it into a rental but you’d still have to pay taxes unless you are able to use it for your primary for another year out of the 5 before selling it.

[Michael]

You’re asking a lot of questions that most accountants would tell you no.

It’s good to do your own research but if something that seems skeptical then the answer is generally no.

There’s no “fly” test. You really should read the articles already provided.

If you found an accountant that would do anything for you but when you get audited if it’s wrong then you’re still wrong.

Obviously you should find a professional that is helpful and easy for you to work with but accountants are not to help you avoid taxes.

They should help you claim the credits you deserve.

Real estate deferrals or write offs are mostly rentals or business activities involving the property.

Primary residence has very few exceptions.

Your CPA is correct.

This is a fundamental question that very few CPAs would get wrong.

[Shawnda]

You are mixing up your information with a 1031 exchange, which is for investment properties- not personal.

[Graham]

Did you already sell? Might pay off to hold it til the 2 year mark. Do the math

[Le Ann]

I live in Idaho and my accountant gave me a one time exemption when I was in the same situation.

Good luck!

[Sandra]

Rolling your capital gains into the next house has not been valid for many, many years.

Here may be a way depending on why you have to move.

I recommend you read about capital gains on home sale at the IRS website, it’s refreshingly readable.

[Mark]

Buying another house is not an option to avoid taxes on the gain. Only buying and selling expenses can be subtracted to lower your basis.

Major upgrades can lower your basis too…

the new olympic sized in ground pool and the 200k new kitchen will lower your basis.
Too bad you couldnt stay another year…

all you need is two out of the last five to exclude the gain.

Good news is you had a nice gain… congratulations!

If not already doing it…

max out pretax IRA and HSA contributions to get some amount off the taxable income line.

[Author]

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