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I am in the United States, in Colorado.

I purchased a house in July of 2013. It was in poor condition, so I spent the first two months repairing things before moving in. Now, 11 months after moving in, I'm ready for a change. Here's the plan. I'm wondering what the tax implications will be?

Current house:

  • Purchased July, 2013
  • Purchase price: $72,000
  • Down payment / closing costs: $20,000
  • Materials and permits for repairs: $20,000
  • Sell in September, 2014 for $150,000, taking away ~$75,000 in cash.

Basically, I'll make $35,000 on the current house after all expenses. How much do I need to put toward my next house to avoid taxes? I have my eyes on a house for $130,000. Ideally, I'd put $50,000 down, use $10,000 toward repairs/upgrades, and use the remaining $15,000 to pay off debt.

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Can I ask when you would expect to close on the new house? Do you have the capital to buy it without selling the current one right away? You will be taxed at your capital gains rate. Let's assume this is 15% which is ~$5k on your ~$35K profit. However if you buy the new house but live in the current one for the remaining 13 months then you won't pay the capital gains tax at all. You could rent the "new" house in the meantime. –  Matthew Aug 21 at 19:54
    
That's actually not a bad suggestion! The rental market's decent here, enough that I could likely make money off the new house for a year before I move in. Thanks for the input. –  philipthegreat Aug 21 at 19:58
    
Materials and permits for repairs: $20,000 - Caution some of this amount may not be deductible. –  mhoran_psprep Aug 21 at 20:22

2 Answers 2

up vote 14 down vote accepted

Short Answer: You're going to end up paying taxes on it.

Despite the home being your primary residence, you don't meet the ownership test, and it isn't noted that you have had a change in employment, health, or other unforeseen circumstances that are "forcing" you to sell. Otherwise, you could qualify for a reduced maximum exclusion that might allow you to walk away without owing taxes, or with a reduced tax bill.

You can't even do a 1031 exchange to re-invest into a new primary residence.

You should check with a tax professional to see what adjustments you can make to the cost basis of the property to minimize your reported net profits.

EDIT: Ownership and Use Tests

During the 5-year period prior to the sale, you must have:

  • Owned the house for at least 2 years, and
  • lived in the house as your main home for at least 2 years.

These periods do not necessarily have to coincide (You don't to live in it as your main house for 2 consecutive years, just 2 years worth of time of the last 5).

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2  
This applies exactly to my situation. Since my reasoning is no better than "I saw a cool house I want", then I'll have to pay tax. –  philipthegreat Aug 21 at 18:45
3  
For other readers, can you please explain what the "ownership test" is? Here's a link: irs.gov/publications/p523/… –  Jayraj Aug 21 at 19:31

Please Note: Before taking any steps towards a transaction involving possible capital gains tax exclusions, please consult your CPA, attorney or tax advisor. I am not a CPA or Tax Advisor.

Since you have only lived in it 11 months, you don't meet the "use test" for full exclusion. However, even if you haven't lived in it that long, you may be able to exclude some of the gains due to a "unforeseen circumstance", not just because you wanted to move. You say you are "ready for a change" and so that means it's an arbitrary decision, not a forced one. To calculate the partial exclusion, take the number of months you lived there before the sale and divide it by 24. (11/24 = 0.45). So for an unmarried person, you can exclude up to $250,000. Multiply that by .45 and you get $112,500. If your profit after everything is taken out is only $35,000 then you can exclude that from capital gains because it is less than $112,500.

All that being said, you will need documentation in case you get audited.

For more information, see IRS Publication 551, Basis of Assets, and look for the section on real property.

See also this IRS Tax Topic on Sale of Your Home

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Thank you for the excellent links. It is clear to me that I do not qualify for the partial exclusion in this case, but it is wonderful to know the partial exclusion exists. –  philipthegreat Aug 21 at 18:48

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