2 out of 5 year Capital Gains Help

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2 out of 5 year Capital Gains Help

Wojciech Grajewski
New York State · Member since 2017 · 21 posts · 8 votes

Hello,

I purchased a home with VA mortgage in July 2016. From July 2016 to April 2017 I did not live in the property (it was livable but I decided against it) because I was doing a whole home renovation. From April 2017 till now I have been stationed in Europe with US Army as a civilian contractor. My questions are as follows:

Should I rent the home out? I would be making very good profit BUT I'm afraid I would have to renovate the house since I renovated it with high end finishes (I thought I would live there).

Should I sell it? I would make $250K profit assuming I do not have to pay capital gains tax. 

I might qualify for the capital gains tax exclusion but still end up paying a lot of money in taxes.


Also, I have a very good paying job which I would not want to leave until my business is up and running which could take at least 1 year. 

Any opinions on this situation would be greatly appreciated it. 

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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
5y

Sell and repeat.  Congrats on the big profit (tax free).

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  • Mark H. Porter
    Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes
    5y

    Has anyone been living there for the last 3+ years?  Rented or empty?

    What do you mean you'd have to renovate it because you used high-end finishes?

    Why would you pay taxes beyond the capital gains?

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  • Kenton LeVay
    Investor · Austin, TX · Member since 2018 · 119 posts · 114 votes
    5y

    I would recommend you sell it. Even if you aren't able to qualify for a capital gains tax exclusion, you could still defer those taxes via a 1031 Exchange and use your $250k profit to buy one (or multiple) rental properties in a market that will give you good cash flow, if that's what you're after. I guess I don't know your market, but if you went all out on the renovation (meaning it lasted for 10 months), it doesn't make much sense to just rent it out.

    All that being said, I am not a CPA and you should check with one first before you follow this advice.

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    5y

    Sell and repeat.  Congrats on the big profit (tax free).

    2Reply
  • Wojciech Grajewski
    OP
    New York State · Member since 2017 · 21 posts · 8 votes
    5y

    @Mark H. Porter -  Yes, my cousins has bee living there since for about a 1 year now. 

    It has never been rented. 

    While renovating the home I used high end finishes expecting to live there. I am leaning away from renting since tenants will not take care of the house (not as well as I would) and I would have to do some renovations if I rented it out for the next 2 years.

    I will have to pay Capital Gains tax IF I sell since I have never lived in the house. I don't qualify for the 2 out of 5 years exemptions (IRS Publications 523). Also, I miss wrote by saying that I will have to pay any taxes beyond the capital gains tax. 

    Is there any way to bring those capital gains taxes down? Writing off cost of renovation? 

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    5y

    @Wojciech Grajewski Your improvement costs (not normal repairs) get added to your basis, reducing your gain.

    1Reply
  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    5y

    @Wojciech Grajewski

    You likely want to talk to a CPA to determine what exactly your tax would be if you decide to sell the property. Once you have this figure, there should be a discussion on what you could do to defer or exclude the tax.

    When figuring out the tax burden, you should factor in all taxes(Federal and State). A lot of people missing the state tax calculation.

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  • Paul MoorePro Member
    Commercial Real Estate Fund Manager · Lynchburg, VA · Member since 2015 · 1k+ posts · 1k+ votes
    5y

    @Wojciech Grajewski. Congrats!  I would also ask what your goal is. If you want to be a real estate investor, you may want to do a 1031 exchange into other rental properties as @Kenton LeVay said. If you don't want to be a real estate investor, and are just looking for asset growth and passive income... or if you fail to find a 1031 exchange property in time, you could do your 1031 exchange into a DST (Delaware Statutory Trust). If you do that, make sure to find a DST with both cash flow and projected appreciation. Best of Luck!

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