Trump Tax Reform to Capital Gains Exemption for Primary Residence

8 Replies

We are in an odd position if this tax reform to the capital gains for primary residence gets passed as planned.

We've owned our primary residence since October 2014. Since we had over an acre of land we had it surveyed and subdivided.

The first of November (2017) we sold off the three subdivided lot from our primary residence to a developer/builder. We were planning to on selling our house our after the new construction was complete to maximize our profits.

Under current law both the sell of the land and the sell of the home would qualify together for the $250/500K Capital Gains Exemption for Primary Residence Sells.

Now due to the Trump tax reform change from the current 2 out of 5 years requirement to the revised 5 out of 8 year for this exemption, next year we will stuck between these two requirement since half of the transactions will have taken place prior to these reforms being passed and the other half after...............

I have read no where of any kind of provision for grandfathering in any exemptions.

Not sure how to handle this one but we don't want to get stuck paying taxes on the 150K profit we made.

Any advise is much appreciated.

Per IRS Publication 523 (page 5)

"Vacant Land Next to Home If you have vacant land adjacent to the land on which your home sits, you can only claim the sale of that land as part of a sale of your home if ALL of the following are true. You owned and used the vacant land as part of your home. The sale of the vacant land and the sale of your home happened within 2 years of each other. Both sales either meet the eligibility test or qualify for partial tax benefits as described earlier. If your sale of vacant land meets all these requirements, you must treat that sale and the sale of your home as a single transaction for tax purposes."

@Daniel Klucas , Bam - the perfect storm!!  I don't see a grandfather of any kind for you.  The current law is pretty specific that both properties must meet the criteria or qualify for an exception to the time.  I'm not aware of any change to the wording of the reg other than the change from 2/5 to 5/8.  And stretching it to 5/8 for you puts the lots out of compliance calendar wise.

This is why Gideon Tucker once said, "No man's life, liberty, or property are safe while the legislature is in session".

@Daniel Klucas

Two thoughts. The first one does not help, but still... After(if) the reform becomes the law, there will be Regulations clarifying it. It's entirely possible to have some kind of phase-in and/or limited exclusion provisions later on. Of course, nobody can predict what the Treasury will do.

Second thought is - see if you can sell the house in December and lease it back from the buyer until your new house is ready. Maybe you can even sell it to a friendly party short-term, but you have to be careful structuring this. I know, very little time left, but it would protect you if you can pull it off.

@Michael Plaks   I predict there are going to be a ton of owner contracts between now and Jan 1 :)

Yep I’m in the perf ct s#%! storm. Maybe there will be a phasing in period or some sort of exclusions provisions. 

 I was hoping to avoid having to “sell”  right now, but it looks like I may have to rush this process before the end of the year. 

I may follow Clint Coons teaching here. https://youtu.be/MWFzAE7wu3k

Just got to figure out how to handle the mortgage part which was refinanced in October as part of the subdivision and separation process. 

Originally posted by @Daniel Klucas :

Yep I’m in the perf ct s#%! storm. Maybe there will be a phasing in period or some sort of exclusions provisions. 

 I was hoping to avoid having to “sell”  right now, but it looks like I may have to rush this process before the end of the year. 

I may follow Clint Coons teaching here. https://youtu.be/MWFzAE7wu3k

Just got to figure out how to handle the mortgage part which was refinanced in October as part of the subdivision and separation process. 

I am sorry Daniel.  That is one of the biggest issues I have with our political system; we are not told what the rules are going to be until the very last minute.  Congress, particularly with tax-related issues, seems to wait until the very last minute to pass laws so people are forced to react based on what the current rules are rather than gambling on what the law will be.

In 2010, people were making larger gifts than they might otherwise have because they did not know how the estate and gift taxes were going to be in 2011 and beyond.

In 2012, people had to make a number of financial decisions because of the Fiscal Cliff, and many people probably ended up regretting it once Congress finally decided to pass a law and resolve the issue.

Unfortunately, Congress has not learned its lesson.  Its December, and we do not know what the tax law will be in 2017.  Compounding the problem, Congress has not given the Treasury Department time to say how the law is going to be enforced and issue Regulations (a process that can take months).

This 5/8 rule change for the Cap gains exemption for primary residency really bites.

Anyone who's been following it have updates on how likely it will pass and how soon will it take effect?  Forgive my ignorance, I haven't been following the news enough.

Looks like we are safe....I think.  From what I'm reading now section 121 will remain at 2/5 and not move to 5/8.  Hopefully, for all of us, this stays true and this tax reform is signed into law this way.

According to the NAR, the final bill retains prior law re 2/5 cap gains requirement. The 5/8 change was passed by the Senate but supposedly killed in the house thanks to pressure from the NAR.

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