I'm pretty new to this. I'm just starting the process of selling my first home (which my husband already owned when we met so I had no part in buying it either). So I have to admit that I don't know much at all. I have a lot of questions but I'm just going to bug you guys about one question about taxes.
My husband and I are selling our townhouse and moving to another town. We are not going to buy a new place right away but will instead rent for the first year or two as we are not sure that we want to live in this new town permanently. I know that we have to pay certain taxes when we sell our home, but as I understand it we can avoid paying at least some of these taxes if we invest our money from the sale of our current house into a new house. Is this correct? If it is, how long do we have to put the money into a new place to avoid paying these taxes? Also, is it necessary to put the money from the house into a new place or can we invest it into something else, like a retirement account or similar? I've been told that you can't just put the profit from the sale into a savings account or spend it. Is this true?
If someone could help me shed some light on these things I would really appreciate it. Any info would be really helpful. If it matters, I live in Illinois.
Thanks a lot,
I'm not sure who's giving you tax advice, but quit listening to them! The rule on having to reinvest your GAIN from the sale went away in about '86 IIRC. The current rule is that you must have lived in the house as your primary residence for 24 of the last 60 months, 2 of 5 years.
As long as you meet the 2/5 rule you don't pay income taxes on the first $250K of gain, $500K if you're married filing jointly, which it sounds like you are.
Congratulations on a nice gain (I guess), spend, invest or save it in any way you want.
You are referring to the old law under Section 1034, which allowed you to defer all of your capital gain into the purchase of a new primary residence as long as you traded equal or up in value. This law was repealed and replaced with Section 121 in 1997. Section 121 is usually called a 121 exclusion. You can exclude up to $250K in capital gain taxes per person from your taxable income as long as you have owned and lived in the property as your primary residence for at least 24 months out of the last 60 months. The 24 months does not have to be consecutive, just a total of 24 months out of the last 60 months. There is no requirement to reinvest in any other property. It is merely a tax-free exclusion upon sale provided you meet the ownership and living requirements of 24 months.
Here is the letter of the law from the IRS
If you are lucky you can make 500k as a couple on the increased value of your primary residence when you sell it every 2 years!