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I am selling my primary at at approximately $170k profit after fees. I'm already under contract for a new primary in another state. However, the new house will close a month or more before my primary is closed / sold. Thus, I'm not putting much down on the new house, but will refinance within a few months on the new house and put more down to avoid PMI (broker is waving most fees if I refi within 90 days). Because of this, will I have to pay capitol gains on the $170k? What are the tax implications? Do I need to do a 1031 exchange?

Also, I am using all of the proceeds from my ESPP and options grants for a large portion of the down payment (because I won't have the $170k yet for selling my primary). Is there a way to get some of the taxes back that I've already paid on my options grant / sold stock or the shares I sold in end of 2015 from the ESPP?

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If it is your primary residence and you lived there continuously and for more than 2 years out of the last 5 - then you can exclude the gain under the IRC Sec. 121. In this case, you'll pay no taxes on your gain.

If the property has been a rental or you haven't lived there long enough, the rules become more complicated but you may still be able to exclude some portion of the gain, even all of it, depends on the situation.

So it doesn't look like 1031 exchange is good for you here, you don't want to carry excluded gain - you want to recognize it and get the tax benefit.

However, refinancing after purchase with cash-out money affects the deductability of the loan interest. You can only deduct interest on money used to buy, not cash-out portion.

I believe there's a period (60 days IIRC) during which you can do the cash-out refinance and still count it as purchase money, but check with a licensed tax advier (EA/CPA licensed in your State).

  • Thanks! It was never a rental... We've lived here 3 years exactly. Looks like i'm safe there. Not sure I understand about the refinancing bit. This isn't a "cash-out" scenario, but rather i'm putting more cash down to reduce the monthly payment and get rid of PMI. I'm buying the house with 7.5% down, and then refinancing within 90 days and bringing another 12.5% as a down in order to get me to 80/20 LTV. – maplemale May 10 '16 at 16:48
  • because it will be a refinance, you have to deduct any "points" over the life of the loan. – mkennedy May 11 '16 at 17:29

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