Q: A friend of mine purchased a house in January, 2004. But his plans have changed and he now must sell his house, although it’s only a year and a half later.
His profit will be approximately $80,000. Does he have a certain time frame to reinvest before having to pay capital gains?
A: Unfortunately, your friend has to live in his house as a primary residence for two of the past five years in order to take advantage of the capital gains rules. Just to be perfectly clear, when the IRS revised its rules several years ago, it eliminated all of the rollover replacement rules.
You cannot escape capital gains tax by rolling over your profit from one property to another.
If your friend is selling because of a divorce, medical reasons, or a job move, it’s likely he will be able to take a proportionate share of the profits tax free.
For example, let’s say your friend closes July 1, 2005. He would have lived in the property for 18 months, or 75 percent of the time needed to take up to $250,000 in profits (or up to $500,000 if he’s married) tax free.
If he gets a new job that is at least 50 miles away from his old one, or has extremely high medical expenses or is going through a divorce, he might be able to take 75 percent of the maximum profit amount tax free, or up to $187,500 (if he’s single) or up to $375,000 if he’s married, tax free.
Assuming your friend falls into one of those categories, he would be able to keep his $80,000 tax free, which would be pretty nice money for living somewhere for just 18 months.
For more information check out IRS Publication 523 “Selling Your Home.”
Published: Jun 10, 2005
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