Move Up and Pay NO Taxes

By
Real Estate Agent with GreatWest Realty DRE# 00827565

 

 

Some homeowners are hesitant to "move up" to a bigger or more luxurious home or location.  They may be cautious about selling because they feel they may have to pay substantial taxes on the equity that has accrued on their present home.  They concern is likely based on old IRS rules regarding some home sales prior to May 1997.  Often homeowners can "move up" and pay no taxes!  Here's why.

The profit tax can be avoided when selling a home by purchasing another principal residence of equal or greater cost within 24 months before or after the home's sale.  But many home sellers get confused about the technicalities of the current tax rule, which is far more liberal and taxpayer friendly, than the older replaced "rollover residence replacement rule" of IRC 1034. 


If you live or dwell in the house for two of the five years before you sell, the IRS won't collect tax on sale profit of up to $250,000 if you're single or $500,000 if you and your spouse file a joint return.
  The stipulation that sellers need be aged 55 or older to qualify, was eliminated with the replacement of IRC 1034, by the "2 out of 5" rule initiated on May 7, 1997.

Currently the law rewards people who sell frequently. In this current market, homeowners who sell every couple of years can benefit.

Still, remember to always keep track of what you paid and what improvements you make. The improvements add to your home's basis, which you subtract from the sale price to determine your profit and whether any of it is taxable.

Surprisingly, many home sellers don't know how to determine their net sales price and their profit of their old home.  It's really quite easy.

Home sale profit is the difference between the home's "adjusted sales price" and the "adjusted cost basis."

Adjusted sales price is the same as the net sales price.  That's the gross sales price minus selling expense.  To illustrate, suppose your home buyer pays $250,000 for your house.  But from this money you must pay sales costs of $15,000 for the real estate commission, and $3,000 in miscellaneous other fees.  Thus your adjusted or net sales price is $232,000.

Your home's adjusted cost basis is determined by adding (1) your purchase price, (2) most closing costs which were not tax deductible at the time of purchase, and (3) capital improvements added during ownership, and subtracting (1) any depreciation deducted for business use, such as home office and (2) any casualty loss tax deduction claimed during ownership.

For example, suppose you paid $150,000 for your home, had $3,000 of non-deductible closing costs at the time of purchase, spent $20,000 on remodeling project, deducted $2,000 depreciation for an office at home, and claimed a $4,000 casualty loss.  Your adjusted cost basis is therefore $167,000.  The $167,000 deducted from your $232,000 adjusted or net sale price produces a $65,000 sale profit.

For important tax questions it is advisable to seek the advice of a tax professional or CPA.

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Show All Comments
Rainmaker
1,808,173
Lou Ludwig
Ludwig & Associates - Boca Raton, FL
CRB, CRS, CIPS, GRI, SRES, TRC, e-PRO

Myrl

Thanks for sharing the tax information for the move up buyer.

Good luck and success.

Lou Ludwig

Feb 26, 2011 10:24 PM #1
Rainmaker
626,973
Thom Abbott
MyMidtownMojo.com |770.713.1505 | Intown Atlanta GA Condo Living - Atlanta, GA
Midtown Atlanta GA Condos For Sale

Myrl...great information to pass along to our buyers! So many things they (and we) need to now when buying and selling real estate!

Midtown Atlanta Real Estate

Feb 26, 2011 10:28 PM #2
Ambassador
1,583,405
Tammy Lankford
Lane Realty Eatonton, GA Lake Sinclair, Milledgeville, 706-485-9668 - Eatonton, GA
Your Lake Sinclair Expert (706-485-9668)

Myrl- a great reason consult with a CPA about a purchase or sale of a home.

Feb 26, 2011 10:45 PM #3
Rainmaker
274,541
Jack Mossman - The Nines Team in Stockton
The Nines Team At Keller Williams - Stockton, CA
The Nines Team at Keller Williams

Myrl - Do you remember the "home ownership ladder?"  It seems that folks have forgotten that the starter home eventually ends up as the trophy home ... after MANY years .... The new capital gains exemption is a goldmine .... moving up that ladder to whichever rung to find yourself!

Feb 26, 2011 11:09 PM #4
Rainmaker
725,882
Juli Vosmik
Dominion Real Estate Partners, LLC, Scottsdale, AZ - Scottsdale, AZ
Scottsdale/Cave Creek, AZ real estate 480-710-0739

Myrl - great post.  I had a client call me today and she was asking just this same thing.  Funny thing, she had talked to her CPA and didn't believe him.  I was able to direct her to the exact tax bill you cite.   I really appreciate your accuracy and information - you're a great source for directing people and I appreciate all you do. 

Feb 26, 2011 11:13 PM #5
Rainmaker
377,624
Ricki Eichler
CastNet Realty - Ingleside, TX
Broker,GRI,ABR, - Your Coastal Bend Home Source

Hi Myrl,  Good blog with an easy explanantion and good example.  Sellers will appreciate this.

Feb 26, 2011 11:41 PM #6
Rainmaker
1,426,706
Ron & Alexandra Seigel
ra@napaconsultants.com - Carpinteria, CA
Luxury Real Estate Marketing

Hi Myrl,

This is a great reminder for the moving up set.  Thanks for sharing it.  A

Feb 27, 2011 01:34 PM #7
Rainmaker
592,490
Laura Giannotta
Keller Williams Realty - Atlantic Shore - Little Egg Harbor, NJ
Your Realtor Down the Shore!

Now is the time for home owners to move up, if they can.  It's unfortunate that in New Jersey, they're often not able because of property taxes!

Feb 27, 2011 06:09 PM #8
Rainmaker
534,387
Maria Morton
BHG Real Estate - Kansas City Homes - Kansas City, MO
Kansas City Real Estate 816-560-3758

Myrl, this is such a good post for home sellers and move up buyers to understand the tax advantages when selling and buying.

Feb 27, 2011 07:25 PM #9
Rainmaker
374,960
Linda D. Pufford
Stage with Divine Style - Home Staging - Novato, CA
ASPM, Marin/Sonoma Home Stager

Myrl,

Really great information... Sellers are smart to list with you so that they have all the latest information.  Thanks for sharing it with us!

Mar 01, 2011 07:11 PM #10
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Rainmaker
1,195,026

Myrl Jeffcoat

Greater Sacramento Real Estate Agent
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