Q:

Subject: Exchange Question

 

I’m purchasing a primary residence that I will be closing on within the next two weeks. This is new construction and I have been waiting since early this year to close on the property.

In the few months since deciding to purchase the condo, my situation has somewhat changed. My boyfriend and I have decided we are going get married and want to purchase a home together most likely within a year. I should mention that I am purchasing the above property as my own, sole and separate property.

I know about the $250,000 exclusion from taxes once you’ve lived in the property for at least 2 of the last 5 years, but what do I do if I decide I want to sell in say in the next 3-12 months. I don’t want to keep any of the profit for myself, I just want to roll it over into the purchase of a larger primary residence.

I’ve also looked into doing a 1031 exchange, but it seems that they are only available for investment and rental property, but not for primary residences.

Please help!

Sincerely,

A:

1031 exchanges are not allowed for personal residences.

You didn’t say how much profit you are anticipating on the sale, after deducting the selling costs and fully accounting for your purchase price, capital improvements and other additions to the cost basis, such as appliances and furniture you will be leaving with the home.  If the pro-rated tax free gain of $342.47 per day of ownership and occupancy isn’t enough to cover your net gain, you could consider delaying the sale.  I have heard of people locking up buyers, but with delayed closings just for this reason.

Any gain above the tax free portion will be considered short term capital gain, subject to ordinary income tax rates.  What you do with the sales proceeds will make absolutely no difference whatsoever.

You can see much more on this on my website.
   
As always, it would be a very wise move to consult with a tax pro on this and the myriad of other tax twists due to your upcoming marriage.

Good luck.

Kerry Kerstetter

Follow-Up:

Kerry,

Thank you very much for the information. I am actually trying to find a good CPA in my area, but I keep getting hooked up with people who dont return my calls!

Just one other question… I expect my profit to be somewhere in the 15,000-30,000 range when I sell. Don’t you have to qualify for some type of special circumstance, or “unforseen event” to be able to obtain the prorated tax-free gain?

Thanks again for your advice, I really appreciate it.

Also, I did read up on your site and it was quite helpful. Thanks for posting such useful information for the rest of us.

Sincerely,

My Reply:

Change in marital status is one of the special circumstances that qualifies a home seller for the pro-rated exclusion.

Your profit should be small enough to be excluded.

Good luck.

Kerry Kerstetter

 

Q:

Subject: Equipment Deduction

Dear sir,

 

I have a friend who has a paiting business. He wants to know his options for deducting the cost for the purchase of all of his paiting equipment on the year’s tax return, 2004. He knows there is a rule that says he can take the entire cost this year if he wants to do so (I think section 179). He said that he made a small amount of money in 2004 and probably won’t have to pay much tax. What would he should do in this situation.

 

Thank you very much.

 

Regards

A:

I have extensive info on the Section 179 deduction on my website.

Your friend needs to be working directly with a tax pro who can help him set up a strategy that will work best for his particular situation and not obtaining advice second-hand from you.

Kerry Kerstetter