Q:

I have a question. I hope you can answer. I signed a contract to buy a house for primary resident about 2 yrs ago. My settelment is this week for that house and currently i am renting. I am planning to sell that house and buy another one within one year of time. If i sell my house the one i am getting this week. I will have a capital gain and i like to if i were to buy another house will i be paying capital gain tax?

If you can get back to me, i will appreciate it. And what will be your fee.

Thank You,  

A:

I assume you are talking about a home in the USA because that is the only country's tax laws I am familiar with.

You need to check out the info on home sales on my website plus discuss your potential gain with a professional tax advisor.

Some of the specific issues that you will need to cover with him/her include:

The tax free exclusion of gain is only available based on time that you both own and occupy the home as your primary residence. This means that the past two years do not count. Having an option to buy a home is not the same as actually owning it.

Since you plan to sell it after less than two years of ownership, your gain will be taxable unless the quick sale is due to health, employment. or other unforeseen circumstances. Seeing as you are going into this with the preconceived goal of selling within one year, it may be difficult to support the use of this pro-rated tax free exclusion. It is normally associated with unexpected events that happen after you start owning and residing in the home. Your personal tax pro should be able to better work with you to see if you qualify.

What you do with the sales proceeds is completely irrelevant to the issue of taxable gain. It won't make one bit of difference whether you buy a new house or not.

If your gain will be taxable, and it's a large amount, there are a couple of additional things to keep in mind.

If you can close the sale more than 12 months after your purchase date, you will be able to use the long term capital gains tax rates instead of the much higher ordinary income tax rates.

You should protect yourself from being unable to pay the taxes on time by holding back their estimated amount from the cash you put down on the purchase of your new home.

These are just some of the issues you will need to discuss in much greater detail with your own professional tax advisor.

Good luck.

Kerry Kerstetter

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 6/01/2006 10:29:00 AM Send this post: