Hey all~ I'm not sure that I'm wording this question properly. It's been a while since we sold/bought a house.

So here is the deal. Our daughter (actually my stepdaughter) will be selling her house. We are in charge of doing that for her. The house WILL make a profit due to the amount of money she put down on the house to begin with....just not sure how much yet.

So what I would like to find out is how the laws have changed regarding how much time one has to "sit" on the profit before putting it in on another property without having to pay taxes on it?

At one point when we were selling years ago, I think we had like 3 years to buy another home. BEfore that house, I think it was closer to 5 years. So how long is it now?

We're trying to think ahead so she doesn't get smacked with a bunch of capital gains tax...but do within the rules of the property laws. Make sense?

It it helps, we are in KY.

Thanks so much~

Paula

When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes.

Some sellers are surprised by this break, especially if they've been in their homes for a while. That's because before May 7, 1997, the only way you could avoid paying taxes on your home-sale profit was to use the money to buy another, more-expensive house within two years. Sellers age 55 or older had one other option. They could take a once-in-a-lifetime tax exemption of up to $125,000 in profits. And in all instances, there was tax paperwork (Form 2119) to fill out to show that you followed the rules.

Some sellers are surprised by this break, especially if they've been in their homes for a while. That's because before May 7, 1997, the only way you could avoid paying taxes on your home-sale profit was to use the money to buy another, more-expensive house within two years. Sellers age 55 or older had one other option. They could take a once-in-a-lifetime tax exemption of up to $125,000 in profits. And in all instances, there was tax paperwork (Form 2119) to fill out to show that you followed the rules.

Even better, there's no limit on the number of times you can use the home-sale exemption. In most cases, you can make tax-free profits of $250,000 (or $500,000 depending on your filing status) every time you sell a home.

Ah, but we are talking taxes here. You did notice that phrase "in most cases," didn't you? There's always a catch. Before you put a "For Sale" sign in the yard, you need to make sure your house-sale situation is one of those "most cases."

First, the property you're selling must be your principal residence. That means you live in it. This tax break doesn't apply to a house or other property that you have solely for investment purposes. In those cases, the usual capital gains rules apply.

You can, however, turn a rental house into your primary residence, making the sale of it eligible for the exclusion. This is accomplished when you meet the IRS use and ownership tests: You own and live in the home for two out of the five years before the sale.

She will have had to be in her house at least 2 years, though, to be exempt from being taxed on the profits (there are certain exceptions to that - being transferred for a job is one of them). I'm sure OMW's links covered that, but I thought I'd point it out.

quote:

So here is the deal. Our daughter (actually my stepdaughter) will be selling her house. We are in charge of doing that for her. The house WILL make a profit due to the amount of money she put down on the house to begin with....just not sure how much yet.

Just wanted to point out that the amount you put down on the house when you buy it has nothing to do with your profit. The amount you buy the house for whether you put zero down or pay cash for the whole thing up front is called your basis. You can then add certain improvements into your basis, which is almost everything except routine maintenance as far as improvements to the house while you owned it. Taxes, mortgage payments and utilities will not add to your basis but new windows, kitchen remodels and stuff like that will. The difference between your basis (purchase price plus improvements) and what you sell the house for (minus commission) is your profit or loss. I am not sure based on what you said above, that you will indeed have a profit, as I said before because it has nothing to do with the down payment. It will have more to do with when the house was purchased and in what area of the country.

This message has been edited. Last edited by: Isabel1130,

YA! This is great news. She has lived in and been the sole owner of this home for almost 5 years.

She put down $100,000.00 (inheritance from her mother)on the home and she should be able to get close to 200,000.00. It is in an excellent location and a very desirable neighborhood. The homes in this area usually sell fairly quickly. Even with the market being as it is right now, we hope to get it sold in less than 3 months...with the key word being "hopefully".lol

She paid $184.900 for it. That's why I said that there would be a profit...but not sure exactly how much. It is really a shame that she needs to sell it now because had the market been a little (maybe more like a lot better), she probably could have gotten anywhere from $225,000 to $250,000. I'm afraid it just won't happen the way things are currently going. Can't help it though...she has to sell it.

I understand that major changes/upgrades come off the initial "profit" but we are hoping that the changes/upgrades that we've made will help the sell of the house.

What's been difficult is trying to decide which changes to make w/o going overboard financially on things which may or may not make a difference to a potential buyer.

So far, we have concentrated on making sure major appliances are working properly and big things like the heat/AC, water heater, electrical, plumbing are up to date and meet the current codes. The rest has been basically cosmetic changes...like painting neutral colors, carpet cleaned, windows cleaned and general cleaning from top to bottom. Whoever buys this home won't have to clean the first thing because we've made sure that it is move in "clean ready"!LOL

The outside looks pretty good but there will be some landscaping projects to deal with when the weather begins to cooperate.

We plan to show the house empty but add a few little touches such as towels in the bathrooms and possibly some plants...bowl of chocolates or other ? in the kitchen. We are going to leave her breakfast set. We figured it would be a good spot for potential buyers to sit down and discuss their offers. Anyway, that can easily be moved later on. She doesn't need it right now anyway.

I have seen people (sellers) place those diposable "footies" (kinda like nurses/doctors wear) next to the front door and upon entering, they simply slip these over their shoes to view the house. Do you think this is a dumb idea? The point of this is to keep the carpets cleaned.

Oh yeah...one more question. Her windows to not pull out from the inside (bummer). It is a 2-story house and I really don't know how in the world we're going to clean the outside of the windows short of climbing a ladder and removing all the screens. I had seen this outdoor window cleaner product in the stores and wondered if it actually worked. I guess you hook it up to your hose and attach this to the end and go at it that way. Just not sure how well it would work compared to the other way. It sure would save a bunch of time and climbing!!

We hope to have it ready to list in the next 2-3 weeks. It has really been a challenge to drive back and forth..work OUR jobs and get HER house ready, too! There were unexpected circumstances regarding how WE ended up with this task...but it has all worked out so far. As her father and stepmom...we're just trying to help her out in any way that we can.

Anyway, thanks so much for all the links, information and suggestions. Very much appreciated for sure!

Paula

quote:

Originally posted by Isabel1130:
You can then add certain improvements into your basis, which is almost everything except routine maintenance as far as improvements to the house while you owned it.

While I am sure most people "get it", I just thought I would expand on that routine maintenance does not count as improvements, even though cost wise someone might think they do. For example, having to replace the old roof, water heater, or HVAC is maintenance.

quote:

She paid $184.900 for it. That's why I said that there would be a profit...but not sure exactly how much.

If she has to pay realtor fees and/or closing costs on the purchasers loan, I don't think you are going to have to worry about profit. Be extremly careful about putting any more money into this property. You are not going to please every buyer and if the home is just dated but sound most prefer to pick their own flooring and paint colors. If there is new construction in the area it will be a big problem because you will have to be priced below that to sell at all and some of those houses are going for below what they cost to build. Get it on the market quickly and price it below the recent sold comps in the area if you really want to sell and not spend the next year chasing the market down.

Isabel...exactly. We've been working our buns off trying to get this house ready to list. Believe me when I tell you that it was NOT an easy thing...and hasn't been easy..but there are circumstances surrounding this "task" that were highly unexpected regarding our stepdaughter.

I think I've been using the word "profit" way too loosely. I think what I meant to say was that she should get most of her money back that she put down on the house. The actual "profit" won't be all that much.

So I was thinking about the tax thing again. Does it make a difference that the original investment of money down on the house came from and inheritance?

Initially, both girls (actually 1/2 sisters...their mother was married twice) were told that they WOULD have to invest in something in order to NOT have to pay on the inheritance tax. Not certain...but I believe they still had to pay some money...just not sure how much. But all of that is free and clear now.

Isabel (and others), we do have a wonderful realtor who has been exceptional at telling us what should and should not be done.

Luckily, there are no new subdivisions going in...not anywhere close anyway. All the neighborhoods in this area are established, mature landscaping, family oriented, close to shopping/park/schools/etc in either direction that you go. The house also has a fenced in back yard and sits on a corner lot. From what I understand...that is a good thing.

And we do plan to list slightly below the comps in the area. The homes in this location vary greatly in price, but most are generally in the 200 grand range (give or take 50 grand).

We just wish she didn't HAVE to sell it. It's going to be tough to find an apt/condo or townhouse equal to the small mortgage she was paying on the house.

Sometimes life can throw some great challenges..and you just hope that you are making the right decisions.

Thanks again for the replies~

Paula

Please consult a tax attorney.

The so-called "death tax" only applies to multi-million dollar estates. I believe someone was giving very bad advice if they stated you had to buy a home to avoid paying the estate tax.

It makes no difference as far as profit where the money came from that went into the house. It is the price you sell it for minus the basis which includes total improvements that qualify during ownership. If your step daughter paid 184,900 and she made no improvements that qualify, paint and carpet cleaning for example are rountine maintenence as are the other things talked about in OldmanWalts post. If you sell for 200k and the realtors fee is 6% and you pay 4k closing costs for the new owner you now have a loss of 900 dollars, not a profit. There are no tax consequences to any profit under 250K unless your step daughter used the house as a rental at some time during her ownership. If she did, I suggest you consult a tax attorney.

This message has been edited. Last edited by: Isabel1130,