GOP Tax Plan - IRS Section 121 update?

24 Replies

Is there any update on the GOP tax plan and changes to IRS Section 121? Last I read, it was proposed that the capital gains tax exemption requirements may change. The requirements for a tax free sale would require you to live in your primary residence for 5 of 8 years, instead of the current 2 (consecutively) of 5 years. I'm really hoping Section 121 did not change! Any update? Thanks, Taylor

I'm concerned about this as well.  We move every 2 or 3 years to take advantage of this.  Here is an article from my FL Realtors Assoc which came out today:

As proposed, owners must live in their house at least five years out of the last eight; currently, the requirement is two years out of the last five.

The Senate version of tax reform includes an exception for transactions in which a contract is written before Jan. 1, 2018, even if the closing occurs later in the year. If that exception makes it into a final bill that both the House and the Senate pass – and the president signs – any seller with a contract in hand by midnight on Dec. 31 would be safe.

However, the bill passed by the House includes no such exception. As a result, homeowners who hope to sell but have lived in their current home less than five years only have a month left to complete a deal before the proposed tax changes would take effect should the House's take on capital gains taxes become part of the final package.

Should either version make it into the final bill, short-term homeowners who sell in 2018 would no longer qualify for the capital gains exclusion, which covers up to $250,000 for an individual and $500,000 for a married couple. As a result, the difference between these home sellers' tax bill pre- and post-tax reform could be huge.

It won't be known whether the House or Senate version of tax reform is adopted until the bill is finalized, which could happen in a few weeks. But sellers who haven't lived in their house for more than five of the last eight years will want to act quickly regardless of the version that is approved, according to the National Association of Realtors®.

It is in both the house and senate versions of the bill. So if they are able to pass the bill, expect that to be included.

@Russell Brazil thank you! Are you aware of when the House will be voting on the bill? I know the Senate passed it over the weekend.

@Taylor Corder the bill is in conference now to iron out the differences. Once that happens both senate and house vote again on the final version and send to trump for signing. Still a ways to go and things can change fast, or possibly nothing at all.

Originally posted by @Taylor Corder :

@Russell Brazil thank you! Are you aware of when the House will be voting on the bill? I know the Senate passed it over the weekend.

 The house has already passed their version. Now the two bills will go to a conference committee of republicans to reconcile the two versions of the bill, which then will need to be voted on by both chambers. They are pushing to make this happen by the end of the year, which seems likely.

Moderator Note: Remember political commentary is not allowed on the BP forums. A discussion of how the bill affects real estate is allowed, but anyone who jumps in regardless of side to say something along the lines of X Party is great or bad will be moderated.

@Russell Brazil in your opinion, do you think there may be buy opportunities if the bill passes? The NAR is predicting somewhere between 5-15% price drops depending on state and city. For buy and hold investors, the price drops might be something worth looking into?

Originally posted by @Sung Park :

Russell Brazil in your opinion, do you think there may be buy opportunities if the bill passes? The NAR is predicting somewhere between 5-15% price drops depending on state and city. For buy and hold investors, the price drops might be something worth looking into?

 Im pretty skeptical of large price movements from the bill. I do think it will likely not be good for real estate in higher cost, higher taxed areas such as California, Maryland, NY, NJ, MA...but price movements that large are not likely.  If anything I think the effect would be more more of slower price growth in the areas it effects.  Buyers would likely just be buying cheaper properties with their net income after taxes going down with the elimination of state income tax and property tax deduxtions disappearing or being limited.  

Originally posted by @Sung Park :

Russell Brazil in your opinion, do you think there may be buy opportunities if the bill passes? The NAR is predicting somewhere between 5-15% price drops depending on state and city. For buy and hold investors, the price drops might be something worth looking into?

 I would be surprised if this has a large immediate effect on prices. This isn't going to swing effective taxes immediately, and it won't be sweeping. It'll effect some, but no where near all, and it'll take time.

Lots of people will still get the exemption. So I think you'll see prices change once behavior changes, but considering the volume of people it could effect: home buyers that have plans to move, and then the subset of that, homebuyers that have plans to move who's tax event is now changed because of the new law: would be minimal. Though being on a real estate board, you'll find the echo chamber makes it seems more impactful on the overall market, rather than to specific instances, because almost everyone on here is part of these subsets.

For example, this would probably cause me to change my personal plans, and perhaps directly affect my bottom line, but I would be surprised if there are enough situations just like mine to cause noticeable sweeping changes to a market's home prices, and certainly not in the short term.

just my observation.

That partially ruins the live in flip game...that is a big bummer. 

@Matt R. It's a major bummer for the live in flip game indeed! I'm completing a live in flip that hits 2 years in April.... very unfortunate. I'm still going to net a solid profit, but it looks like it's time to change my current strategy.

@Russell Brazil big issue I see in addition to knocking out the folks that like to live in them 2 years sell and do it again like those that build their own homes WINK NOD ...:)

is that,  and something no one has mentioned.. is that if your Adjusted gross income is over 500k a year you lose dollar for dollar any exemption ..

so lets say your adjusted gross is 750k  and you have 500k gain you can only exempt 250k of that.

if you make 1 mil adjusted or more you no longer qualify at all.. So this is clearly a taxing of the wealthy higher wage earner..

So what I am going to do I guess is now have to turn my home into a rental then 1031 and until I slow way down forget about this exemption that has treated me so well over the years...

@Jay Hinrichs we have been having a lot of discussions in my office the effect this will have on our market, as we tend to service higher income, higher priced properties.   Many of us were speculating that the average hold time on the more expensive properties will go up. 

But I was also having drinks within the last week with a congressional chief of staff who himself was having a hard time with predicting the consequences of the bill.  So if the people writing the laws dont have a clue about it's consequences....can any of us really?

@Russell Brazil   for me I just learn to live with this stuff... there are worse problems than paying Cap gains on 500k of appreciation  LOL.... although it sure was nice getting those 500k checks over the years I can say that.. it really spurs the economy.. I used them everytime to invest in my business's that then employed lots of people etc.. trickle down effect as it were.. Its not like I wnet on vacation with the dough.

This is very unfortunate for my "live in flip" strategy.  Guess I'll have to learn to live in a place for longer than 2 or 3 years.  My in-laws think we're nomads.  lol

Same boat as @Taylor Corder . To clarify, if the Senate version passes then we'd be excluded and still be exempt from capital gains tax but if the House version passes not so much?

@Jay Hinrichs in your post above, you mentioned turning your primary residence into a rental and later 1031 exchanging it to defer the capital gains hit.

For someone like me, starting out with their first property (live and flip), would you recommend doing the same since the Section 121 exemption will likely be changed?

Round numbers... 360K ARV - 255 purchase price = 105K -22K (realtor fees @6%) = 83K - 15K (rehab) = 68K profit

Pay Uncle Sam and move on, or rent the property for a short time and then 1031 it? Essentially all my cash will be in this deal.

Also, in your opinion, is it beneficial for an investor who is just staring out to have a RE License? I know this is the age old debate, but would love to hear your take. I'll be staying investing in California, and do not intend to look elsewhere at this time.

Thanks in advance,
Taylor

Susan,

Can you help me understand these changes bases on my current situation?  I am a aspiring developer in the Bay Area and bought two homes in fast succession as I realized they had great value add opportunities.

Home 1 - Purchased January 2016...lived there until April of 2017
Home 2 - Purchased in April 2017, Currently live here but was going to move back to Home 1 for another 9 months to sell it with our $500K exclusion and then reinvest the proceeds to do a large addition on Home 2.  

Under the way the Senate plan was passed, it appears that I will be able to maintain the 2 of 5 year requirement on both houses?  I believe you stated that below, but you noted that a "seller with a contract in hand by midnight on Dec 31st would be safe".  Wouldn't this be for a BUYER that has a contract in hand that wishes to sell their property in two years instead of five?  Maybe I'm just reading this wrong.  The text from the approved Senate Bill states "(2) EXCEPTION FOR BINDING CONTRACTS - Paragraph (1)(in regards to the changes of 2/5 to 5/8) shall not apply to any sale or exchange with respect to which there was a written binding contract in effect before January 1, 2018, and at all time thereafter before the sale or exchange."  Seems like this is a Grandfather clause for current owners, but I don't understand when is says "and at all time thereafter before(??) the sale of the exchange".  

Anyhow, seems crazy to think that all these people that are gearing up to get their properties on the market after two years would be told they'd have to stay another 3 or be taxed heavily.  I sure hope this rule is grandfathered for current homeowners!  Thanks for any insight!

Jared

Originally posted by @Susan K. :

I'm concerned about this as well.  We move every 2 or 3 years to take advantage of this.  Here is an article from my FL Realtors Assoc which came out today:

As proposed, owners must live in their house at least five years out of the last eight; currently, the requirement is two years out of the last five.

The Senate version of tax reform includes an exception for transactions in which a contract is written before Jan. 1, 2018, even if the closing occurs later in the year. If that exception makes it into a final bill that both the House and the Senate pass – and the president signs – any seller with a contract in hand by midnight on Dec. 31 would be safe.

However, the bill passed by the House includes no such exception. As a result, homeowners who hope to sell but have lived in their current home less than five years only have a month left to complete a deal before the proposed tax changes would take effect should the House's take on capital gains taxes become part of the final package.

Should either version make it into the final bill, short-term homeowners who sell in 2018 would no longer qualify for the capital gains exclusion, which covers up to $250,000 for an individual and $500,000 for a married couple. As a result, the difference between these home sellers' tax bill pre- and post-tax reform could be huge.

It won't be known whether the House or Senate version of tax reform is adopted until the bill is finalized, which could happen in a few weeks. But sellers who haven't lived in their house for more than five of the last eight years will want to act quickly regardless of the version that is approved, according to the National Association of Realtors®.

Originally posted by @Taylor Corder :

Jay Hinrichs in your post above, you mentioned turning your primary residence into a rental and later 1031 exchanging it to defer the capital gains hit.

For someone like me, starting out with their first property (live and flip), would you recommend doing the same since the Section 121 exemption will likely be changed?

Round numbers... 360K ARV - 255 purchase price = 105K -22K (realtor fees @6%) = 83K - 15K (rehab) = 68K profit

Pay Uncle Sam and move on, or rent the property for a short time and then 1031 it? Essentially all my cash will be in this deal.

Also, in your opinion, is it beneficial for an investor who is just staring out to have a RE License? I know this is the age old debate, but would love to hear your take. I'll be staying investing in California, and do not intend to look elsewhere at this time.

Thanks in advance,
Taylor

At the risk of looking like a complete idiot...I need to clarify: are you guys saying that ANY profit will be taxed now (if not exceeding the 5 out of 8 year time frame)? i.e no more "as long as it's under 250K you won't get hit with the tax?"

per Tayler's question above, will he be taxed on that 68K in profit he's looking at?

Thanks in advance

Originally posted by @Jared Hazard :
Susan,

Can you help me understand these changes bases on my current situation?  I am a aspiring developer in the Bay Area and bought two homes in fast succession as I realized they had great value add opportunities.

Home 1 - Purchased January 2016...lived there until April of 2017
Home 2 - Purchased in April 2017, Currently live here but was going to move back to Home 1 for another 9 months to sell it with our $500K exclusion and then reinvest the proceeds to do a large addition on Home 2.  

Under the way the Senate plan was passed, it appears that I will be able to maintain the 2 of 5 year requirement on both houses?  I believe you stated that below, but you noted that a "seller with a contract in hand by midnight on Dec 31st would be safe".  Wouldn't this be for a BUYER that has a contract in hand that wishes to sell their property in two years instead of five?  Maybe I'm just reading this wrong.  The text from the approved Senate Bill states "(2) EXCEPTION FOR BINDING CONTRACTS - Paragraph (1)(in regards to the changes of 2/5 to 5/8) shall not apply to any sale or exchange with respect to which there was a written binding contract in effect before January 1, 2018, and at all time thereafter before the sale or exchange."  Seems like this is a Grandfather clause for current owners, but I don't understand when is says "and at all time thereafter before(??) the sale of the exchange".  

Anyhow, seems crazy to think that all these people that are gearing up to get their properties on the market after two years would be told they'd have to stay another 3 or be taxed heavily.  I sure hope this rule is grandfathered for current homeowners!  Thanks for any insight!

Jared


I Think we need to wait and see exactly what they end up passing.  I only know what I read from the Florida Realtors Association article that came out.  

Jared,

I Think we need to wait and see exactly what they end up passing. I only know what I read from the Florida Realtors Association article that came out. 

There are major problems with the Senate Bill.  It cannot be passed as written.  The major one was making the corporate rate and the corporate alternative minimum tax equal.

That means it is about to go to conference.  That will happen about the same time as the possible government shutdown.

Not to mention about the same time as the Alabama Senate race.

So... I am waiting to see what the next version looks like before I decide if it has a chance of passing.

Just a general update, but I read a report that the final bill made no changes to IRS Section 121! Therefore, you can still be excluded from capital gains tax (up to 250K for individuals/500K for married couples) if you've lived in your primary residence for 2 years (consecutively) of the last 5 years! It was not changed to 5 of 8 years.

The live n' flip isn't dead! I was very happy to read this today and just wanted to share!

Cheers everyone,

Taylor

I read your latest update from about a week ago. I am really glad to hear it, where did you read this? On the actual bill or a summary? Thanks for the post. @Taylor Corder

No change to the capital gains exclusion.  You can thank the National Association of Realtors and our lobbying efforts on this. 

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