Greeting, readers. I’m Andrew Keshner and I’m the tax reporter for MarketWatch. I write about the controversies, open questions and best strategies about taxes. For the purposes of this new column, that also makes me the ‘Tax Guy.’
I’m not an accountant. I’m a journalist who will endeavor to help you find answers to your questions, and try to explain on this site what I have learned. That sounds simple, but it can be tricky in practice. And that’s why I’m here.
When I mention this at parties, one of two things happen: discussing “taxes” either induces glazed-over resignation or it sparks fiery curiosity about the ways a person’s extremely specific set of circumstances jibe with IRS rules.
It doesn’t have to be that way. And without further ado…
Dear Tax Guy,
I understand that any profit from a real-estate sale is not taxable if it is used to purchase another house within three years. My question is what happens if I buy another house and then sell my existing house to pay off the loan on my new home?
Does the order of purchase and sale matter?
Mulling the Market
Dear Mulling the Market,
I’m going to let you down gently. You say real-estate profits get a tax break if they are used to purchase a home within three years, but accountants tell me that is actually an old rule and it is no longer on the books. So you’re out of luck.
As to buying and selling: You hope to pocket the profit, minimize your tax liability, and keep all your memories. The order of the purchase and sale does not matter for tax purposes. You do not have to rush into buying another house.
“The principal residence gain exclusion now does not require a taxpayer to acquire a replacement home,”said Jeffrey Olson, a partner at Carr, Riggs & Ingram in Atlanta, who specializes in real estate-related tax issues.
The IRS will let you keep the profits on the sale of your home free of capital gains tax, with some conditions. You must have owned the home for at least two years, and lived in it for two of the last five years (but they don’t have to be continuous).
The first $250,000 in profit is excluded from capital gains tax for individuals and married couples filing separately, according to IRS rules. The capital-gains exclusion rises to $500,000 for a married couple filing jointly.
For a married couple filing jointly, just one spouse has to own it. But each spouse has to meet the use requirement. The two years of ownership and use do not have to be one single continuous period, Olson noted.
“Subsequent purchases don’t play into the calculations whatsoever,” said Rob Seltzer, president of the Los Angeles-based Seltzer Business Management where he works with clients on their tax matters, which include real-estate transactions.
“The only purchase that matters is the purchase of the home you are selling,” he added. In other words, you don’t worry about any sort of reinvestment requirement, but you do need to be aware of other eligibility rules for capital-gains exclusion.
Wrinkles in the tax code
That said, there are wrinkles in the tax code if you have rented out your home during the five-year period, turned part of your residence into a home office, or made renovations and claimed depreciation deductions on the renovations.
Selling your home just got more complicated. House prices are coming down, but they are still high. Meanwhile, mortgage rates are going up and it’s taking longer for houses to sell. Home buyer sentiment recently hit an all-time low.
People typically sell first, and then buy. If you can afford to, however, you could buy a new house, and then sell your existing house and apply the sale proceeds to the mortgage on the house you just purchased.
Uncle Sam’s tax laws are not forcing you to stick to a timeline to buy and sell in a what has become a more difficult market. Just don’t put yourself under any unnecessary pressure in the interim.
Got a tax question? Write me at: firstname.lastname@example.org
Thanks for reading. I want to help you think more broadly about the issues that affect your taxes. I’m not offering tax advice, just an attempt to look at what the swirl of tax rules and economic conditions could mean for your wallet.
I’m here for the reader who faces their taxes with an air of resignation. You’re just not that into taxes, I get it. I was once that guy. Underneath the jargon, think of your taxes like a maze — with money at the end. Or a trap that you need to avoid.