Capital Gains Tax Implication and Advice

9 Replies

Hello all,

I understand, owning a personal property and living in it for more than 2 years you can be exempt from capital gains. I also understand, if you flip your personal property to rental then you can be exempt 2-5 years of sale date.

Two questions here:

1. Can you repeat the 2 year exempt of capital gains? First and sell, second and sell, and third and sell etc. ???

2. In any case if question #1 does not work and you can only benefit from no capital gain tax once, then what happens in a scenario, you buy first property and live in it for 2 years and turn into a long term rental (superseding the 2 out of 5 years of sale date) like renting for 8 years and then sell. Then get hit with the capital gains tax, but then when you buy second property and live in there 2 years and sell, do you get to transfer over the 2 years no tax benefit since you did not use it on the first property? So essentially question number #2 is only valid if question #1 is not allowed. Or you essentially lose out on this benefit entirely since you did not take advantage in first home?

I am not sure how the capital gains tax works guys and need some insight. I bought my first property and I am in a huge learning curve.

Thank you BiggerPocket community,

Kapil

hey @Kapil Patel
Yes, you can repeat the process every time you buy a primary residence and live in that property for 2 years.
When you move on, you are not subject to capital gain tax up to 250K of gain if you are single and 500k if you are a couple.

@Patrice Penda , You can use the primary residence exemption once every two years.  So your scenario works just fine. depending on timing it's conceivable that you might have two properties qualifying with your residency but waiting for the two year wait to end so you can sell the next one and take the 250/500k exemption.

@Kapil Patel

The great thing about section 121 is that there is no limit on how many times that you can use it.

The only rule is that you have to own and live in the property for 2 out of the last 5 years. You also can't do a 121 if you did it in the past 2 years.

Ex. you live in first property for 2 years and sell it. you then live in another place for 2 years and then you sell it.
You would be qualified to do the 121 in both sales

Ex. You live in a property for 2 years and then decide to rent it out. In the meantime you purchase another property and live there for 2 years. You decide to sell both properties. In this scenario - you would only be able to do a 121 on one of the properties.

Basit Siddiqi, CPA
917-280-8544

@Basit Siddiqi I appreciate your explanation. To clarify, if I turn my primary into a rental and buy a second primary, then I have the option of doing a section 121 on either property?

Hey @Kapil Patel I've thought about doing something similar. As long as you stay in the property for 2 out of 5 years you pay no Capital gain tax. If you rent the property for 2 out of 5 years then sell it you'll pay about a 20-30% capital gain tax. You'll pay almost 50% in Capital gain taxes if the property is occupied for less than 2 years. From my point of view it seems to be more benefitial if you flip homes for a long period of time than short. Unless you're averaging more than 125K a year for 2 years profit. 

@Eugene Moore thank you for explaining. What if I live in it for 4-5 years and turn it into rental for long term like another 5-10 years??? Is it still not worth it? What percentage will I get hit with?

I mentioned in a thread a week ago that I had done this numerous times. I would buy a lot, build a new home on a construction loan and then refinance it on a permanent loan when house was complete. I would even obtain a COFI arm permanent loan where the payments were based on an interest rate lower than what the market rates were. The excess funds I received over the cost of construction were used to make the payments on the house for two years. I would then sell the home and do the same thing again. I lived in each home 2+ years. I never had any of my own funds tied up in the house.

You should make sure to ask an accountant if that rule changed with the recent tax changes in the United States. Someone pointed out in my thread that it was a longer period of time now but I have not verified that since I am no longer using that method.

@Kapil Patel , honestly I'm not too sure, you can speak to a CPA or a lawyer who specialize in taxes. But that's a good question.

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