Subject:  Capital Gains question
From:  Frank
Date:  Mon, 03 Nov 2003

I was wondering if you could answer question of mine regarding capital gains taxes.

Nobody seems to be able to give me a straight answer! I own a house in San Diego and am looking to upgrade, but I've only been in the house for 1 year. I heard if it's less than 2 years, you have to pay--no way around it--but then I've heard that if you are upgrading to a bigger house, then you do not have to pay capital gains taxes. The profit will be around $100k, not $250 or $500k.

Thanks for your help!
Frank

Answer

Date:  Mon, 01 Dec 2003

Hello Frank,

Your friends who are advising you are confused because of recent changes in the tax law. For many years, the tax was postponed for any gain on the sale of a principal residence provided it was replaced with a more expensive residence within a certain period of time after the sale. That law was repealed back in 1997.

Under the present law, there are exclusions available provided you used the home as a principal residence during at least two of the five years before selling it. The exclusions are $250,000 for most individuals and $500,000 for married persons who meet certain requirements, filing a joint return. ($250,000 would cover your gain.)

Unless you are willing to pay the tax for selling your home, I recommend that you sit tight until you have lived in it for at least two years. Then you can sell your present home and upgrade. Remember that you will also increase your property tax base when you buy your new residence.

Good luck!
Mike Gray

We have more answers to frequently asked real estate tax questions! We also offer up-to-date information about new tax real estate tax developments in Michael Gray, CPA's Real Estate Tax Letter.

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