Do I need to pay capital gains tax on sale of primary residence?

[Xavier Paredes]

I've searched about this but am getting conflicting info or maybe just misunderstanding what I read.

Two months ago I sold my primary residence in Houston, Texas. Profit was about $100k. 

I file taxes as single.

QUESTIONS:

1. Will I have to pay capital gain taxes on the $100k profit?

2. Are there any time limits by when I must buy another house to prevent paying capital gain taxes?

3. I come across articles for a 1031 exchange but I think that only applies to investment properties. Correct?

4. I read somewhere that we can have the Title Company (which processed the sale transaction) put the money into a trust. Not sure what this is.

5. Anything else I must know?

Sorry for all the questions and for your patience.

TIA!

[Jaron Walling]

If it was a primary capital gains from the sale can be deducted from the seller’s taxes if the seller has lived in the property themselves for at least 2 of the previous 5 years. If you meet the 2/5 year rule you'll be tax free. Single filed max is $250k, jointly is $500k. 

Correct, the 1031 exchange applies for investment properties. I don't see a reason investors would exchange a primary but I bet there's a fun strategy to do so. 

Hope this helps! 

[Xavier Paredes]

It helps. Thank you sir!

[Matt Devincenzo]

There's some 'old' info floating around that took me a few years to realize on this subject. It seems some older sellers believe they need to buy a replacement OO residence to meet the tax gain exclusion. This was the rule prior to 1998 (I think was the date). After that they revised it to the 2 out of 5 and the maximum 250K/500K rule. So if you talk to someone who may have bought and sold homes prior to that date, they are sometimes mistaken on what you have to do.

[Dave Foster]

@Matt Devincenzo, Good catch.  It was indeed 1987 when it changed.  Prior to that you could only take the exemption once in your life time.  So people sold paid tax and moved into a larger house.  At retirement time they would take their one exemption.

@Xavier Paredes, it is indeed as @Jaron Walling said.  All you need to is buy it live in it and sell it while you have lived in it for 2 out of the 5 years prior to sale (you don't have to be living in it when you sell).  You will get $250K of profit ($500K if married) tax free.

And you can do that once every two years - that's the huge power of the exemption. Keep doing it as long as you live.

Bonus material for everyone - It is possible to convert a property from investment to primary.  and then when you sell that property you get a proration of the gain tax free as well!!!!!  Just another tool along with the 1031 exchange to turn tax deferred to tax free!

[Xavier Paredes]

@Dave Foster Thank you! Would you kindly explain with an example what you mean by "...and then when you sell that property you get a proration of the gain tax free as well!!!!!"

I think I understand but not sure.

[Eliott Elias]

If the property was homesteaded than you qualify for tax free profits up to 250k 

[Dave Foster]

@Xavier Paredes, If you convert an investment property (that was part of a 1031) into your primary residence you must

1. Have owned the property for 5 years

2. Lived in the property for 2 out of the 5 years prior to sale.

3. Then you get to prorate the gain between qualified use (as your primary res) and non-qualified use (as investment)

4. And you have to recapture depreciation

Sell a property - do a 1031 - buy a property.  Use it for 2 years as a rental.  Then move in.  Live in it for 3 more years.

Did you own it for 5 years - Yep

Did you live in it for 2 out of the 5 prior to sale - Yep

You would get 3/5ths of the gain tax free and would have to recapture  depreciation.

Best thing since sliced bread!