If I sell my house, will I have to pay taxes on the profit?

Question

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.

Answer 1

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).

Answer 2

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

Answer 3

In response to one of the comments you might be interested in owning the new home as a rental property for a year. You could flip this thinking and make the current home into a rental property for a period of time (1 year seems to be the consensus, consult an accountant familiar with real estate). This will potentially allow for a 1031 exchange into another property -- although I believe that property can't then be a primary residence.

All potentially not worth the complication for the tax savings, but figured I'd throw it out there. Also, the 1031 exchange defers taxes until some point in the future in which you finally sell the asset(s) for cash.