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Old 08-18-2017, 09:41 PM
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Capital Gains ? Kinda odd situation

Hi,
I have a kind of specific tax question. My wife and I lived in a home that my parents purchased as a second home 5 years ago. We have lived in the home the entire time. 18 months ago we refinanced the home and added my wife and I onto the title along with my parents. We are now selling the home because my wife got a new job out of state. Given that we have only been on title for 18 months will we have to pay cg? Do we qualify for a partial exclusion due to the new job? Do we qualify for the full 500k since we lived here as our primary residence for 5 years? Below are some details about numbers.
Original purchase price 350000
Refi amount 375000
Upgrade in 18 months 50000
Potential sale price 800000

Thanks in advance



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Old 08-18-2017, 10:56 PM
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Hi,
I have a kind of specific tax question. My wife and I lived in a home that my parents purchased as a second home 5 years ago. We have lived in the home the entire time. 18 months ago we refinanced the home and added my wife and I onto the title along with my parents. We are now selling the home because my wife got a new job out of state. Given that we have only been on title for 18 months will we have to pay cg? ========> the IRS also allows a reduced maximum exclusion due to changes in employment. Aslongas it is your primary home, then, You may be able to reduce the amount of capital gain on the sale of your residence due to your job change even though you do not meet the 2-year requirement. In your situation, you did not meet the 2-year test due to your job change. The good news is that you may qualify for a reduced exclusion because your new job location is at least 50 miles farther from your old home. The IRS allows a maximum exclusion of $250k of gain ($500k for married couples filing joint returns) on the sale of your qualifying residence if you meet the ownership and use tests. The ownership test means you have owned the home for 2 years. The use test means that over a five-year period ending on the date of sale, you have lived in the home for 2 years

Do we qualify for a partial exclusion due to the new job? =======>Yes as mentioned previously.

Do we qualify for the full 500k since we lived here as our primary residence for 5 years? ======>As mentioned above, no only partially since you do not meet the 2-year requirement

Below are some details about numbers.
Original purchase price 350000
Refi amount 375000
Upgrade in 18 months 50000
Potential sale price 800000===>So your LTCG is $400K;$800K-$350K+$50K; Home improvements may come into play when you sell your home because they're included in your home's adjusted cost basis. This applies only to substantial improvements that add to the home's value, not to repairs. Fixing a leaky shower isn't a capital improvement, but replacing it with a newer, better shower would be. The bigger your basis, the smaller your capital gain, and that means less tax ;To qualify as a tax deduction, the home improvement must;Add materially to the value of your home; or Prolong your home's useful life significantly; or Adapt your home to new uses.
For most people, home improvements ? even major ones ? won't help their taxes after the home is sold. Nevertheless, it's always a good idea to keep track of what you paid in home improvements over the years, not just for potential tax savings but also to help justify your selling price.



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Old 08-18-2017, 11:09 PM
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Thank you so much for the response. So I have been researching this like crazy. Please let me know if my understanding is correct. We have owned for 18 months. This being 75% of the required 24 months. Since we are married filing jointly we should qualify for an exclusion of 500000x.75% or 375000. If this is correct then I should be able to get the taxable amount down pretty low. Does this analysis seem correct.
Again thank you so much for the help.



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Old 08-19-2017, 12:11 AM
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Originally Posted by BBPeik View Post
Thank you so much for the response. So I have been researching this like crazy. Please let me know if my understanding is correct. We have owned for 18 months. This being 75% of the required 24 months. Since we are married filing jointly we should qualify for an exclusion of 500000x.75% or 375000. If this is correct then I should be able to get the taxable amount down pretty low. Does this analysis seem correct.
Again thank you so much for the help.
The reduced maximum exclusion is computed by multiplying the maximum dollar limitation ($250k or $500k) by a fraction. The numerator of the fraction is the shortest of the following periods of time: (1) the taxpayer?s ownership of the property during the five-year period ending on the date of the sale or exchange, (2) the taxpayer?s use of the property as the taxpayer?s principal residence during the 5-year period ending on the date of the sale or exchange, or (3) the length of time between the date of a prior sale or exchange of property for which the taxpayer excluded gain under section 121 and the date of the current sale or exchange. The denominator of the fraction is 730 days or 24 months (depending on whether the numerator is measured in days or months).Say, for example, A single taxpayer purchased a home on July 15, 2008, that she uses as her principal residence. On July 14, 2009, she sells the house because of a change in her place of employment. The taxpayer has not excluded gain under IRC 121 on a prior sale or exchange of property within the last 2years. She is eligible to exclude up to $125k of the gain from the sale of her house [(12 months ? 24 months) ? $250k].
As you said you coown the home with your parents, so actually on the sale of the hoem you won?t owe any tax to IRS/your home state



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Old 08-19-2017, 12:19 AM
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As you said you coown the home with your parents, so actually on the sale of the hoem you won?t owe any tax to IRS/your home state

If I am taking all of the profits from the sale as one of teh owners then Shouldn't I be required for the taxes. Sorry I am a bit confused by your ending comment.
Thanks



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Old 08-19-2017, 11:27 AM
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Originally Posted by BBPeik View Post
As you said you coown the home with your parents, so actually on the sale of the hoem you won?t owe any tax to IRS/your home state

If I am taking all of the profits from the sale as one of teh owners then Shouldn't I be required for the taxes. Sorry I am a bit confused by your ending comment.
Thanks
If I am taking all of the profits from the sale as one of teh owners then Shouldn't I be required for the taxes.=====> as said,Tax laws allow you to take up to $500k profit ($250k if you are unmarried) tax-free on the sale of your primary residence. This primary-home sale exclusion does not apply if you sell your second home: If you sell a house that is not your primary residence, you may have to pay the usual capital gains tax.

so, the rules for the capital gains tax exclusion on a second home sale are tricky. as said no since the total amt of the LTCG is still LESS than $500K.however, your parents still need to pay tax on the share of their LTCG ; since they sell their second home, their capital gains is the portion of the proceeds that exceeds what they paid for the property, plus the cost of any improvements they made over the years.and also as you are taking all of th e profits on the sale of the co owned home, in this case your parents, even if they give you a quitclaim deed , need to file form 709.



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