A year ago we sold our house that we had lived in for 5 years and made about 260K. We invested some of that on a rental property and built another house. We want to sell the new house and because we were the general contractors, we saved a lot of money on the process so we can make about 80K profit plus what we spent on the house.
We want to put the house on the market and will be moving to another country to retire, where we will buy a house to live in. I just don't know about the capital gains tax? If we wait two years do we still have to pay? If we sell before that and buy property in another country then does the 1031 rule applies?
Congratulations on that first sale - 260K tax free is a nice hit.
Real estate outside the US or US territories does not qualify as like kind for real estate in the US. So unless you are looking at the USVI, Guam, or American Samoa you could not do a 1031 exchange.
What I think is more detrimental to your case though is that from what you say your intent in building that house was primarily to resell it. If that was your intent then you also cannot do a 1031 exchange since the 1031 is allowed on real estate that is "held for productive use in business, trade, or for investment."
Your current rental would qualify for 1031 treatment as would your new house if you could demonstrate that your intent was to hold it for productive use.
If you lived in thee house it's eligible for a1031. If you simply built it, and sold it for a profit without living in it, it still wouldn't be eligible...1031's are for properties acquired with the intent of a long term investment. Establishing intent is a different animal for a relatively short holding period.
Morning Wayne :) Look right above you. Slight twist to what you said though. If they had lived in the houses they would not qualify for 1031s they would fall under sec 121 like their first sale, live in it 2 out of 5 and the first 500K in gain would be tax free.
I've got several contractor friends whose business model for years has been to build two customs at a time. They sell one to pay for the expense of building two and for living cash. They move into the other one. On the first they pay taxes. On the second they live in for two years while they build their next two houses and then sell and take the first 500K in gain tax free. A beautiful scenario. And certainly possible here although it would slow down the overseas repatriation.
Thanks Dave it was a nice sale. We did not build the second house with the idea of selling it that fast, although it is always supposed to be an investment as any house is :). We just decided we want to retire somewhere else and it is the right time for us to do so. Although I think in the eyes of the IRS they don't care. We currently live in the house and were planning on doing so for a while. Either way it seems I have to pay capital gains tax, but if I wait another year and then sell that means we had lived in the house for 2. Now the big elephant in the room do we pay taxes on the whole profit which will be what we spent on it and what we make? As we did not get a mortgage
Profit is profit, doesn't matter if you used a mortgage or not. Example $200k in, $300k net sales proceeds, $100k gain.
Your gain is roughly the amount you sell it for less what it cost you. A mortgage or lack of one does not impact that. If you wait till you've lived in it for two years you have no tax on your gain since it will fall under limits of sec 121. If you sell prior to that you will pay tax on the entire amount of your gain.
It sounds like you'll easily have a $100K gain in another year or so. Since you have no mortgage why not access a line of credit against that house and shop for your retirement home outside the country. At the end of two years sell the home, pay off the mortgage, take the gain tax free and sail off to your new retirement home.
Wayne what you said sounds interesting! So I will still have to live in the new house for 2 years, right?
Dave that is a wonderful idea!
Your primary residence is not eligible for a 1031 exchange. If you have owned and lived in the property more than one year but less than two years at the time of sale, then your sale profit will be taxed as a long term capital gain (could be zero percent, 15%, or 20% depending upon your marginal tax bracket). For a primary residence that you have owned AND occupied at least two years of the five years prior to sale, up to $250K in capital gain per taxpayer can be excluded from taxes.
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