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I'm confused on this. How does it work? When I retire, I am going to take a few months to remodel my home and sell it so that I can build my home in Texas. I already have the land. My confusion is this? Is 1031 what I use? I read that with 1031, you already have to have the property to put the money into. The money never gets to see a bank. It goes right from the sold property to the new property. How can I do that if the new property won't even have plans drawn yet? I thought I had two years? I wanted to bank the money and rent until I got the plans drawn and sought out the things I wanted in it. Also, can I take $250K off of the sell price and bank that...puting the remainder into the new house? How does that capital gains thing work? Can anyone explain to me what I have to do when I sell my house, to start building the next one This is all new to me. I've only ever bought one house. Thanks.
Not sure what you mean by 1031. But as far as the capital gains exemption goes, if you lived in your current home for 2+ years, you are exempt on 250k gain on the home, 500k if you are married.
If you are looking to put money from the first home into the second above that 250/500 exemption, you need to hold it in escrow until your second closing. It's best to use a real estate attorney who would act as your escrow agent.
What you want to do ... sell your existing home and use the funds to build another ... isn't something you'd do in a 1031 exchange.
1031's merely defer tax liability, and you want to end the tax trail. So, use your tax exemption (married, that's $500,000) when you sell the first property and end that tax exposure permanently for that sale.
Remember, the taxable amount is only on the appreciated basis of your gain. This means that your tax liability is on the amount of sale price over your cost basis of the property. (Ex: you bought for $200,000 and sell for $500,000; your taxable gain is $300,000 ... but you can exempt that with your $500,000 exemption. Note that you can repeat the $500,000 exemption every few years if you trade up through houses).
Selling a primary residence is not subject to capitol gains if the property is owner occupied for 2 out of the last five years. Singles may exclude up to $250,000/Marrieds $500,000...it can be used every 24 months.
Selling an investment property is different to defer the capitol gains you may buy a replacement property of like kind in a 1031 starker tax deferred exchange. For more information on a 1031 exchange read this: http://www.irs.gov/businesses/small/...=98491,00.html
Disclosure: I am a licensed real estate broker in Colorado, but unless you hire me specifically, I am not your broker. And this is not legal advice.
Location: Sometimes Maryland, sometimes NoVA. Depends on the day of the week
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My understanding is that a starker exchange is only for investment property - you can't use it on your primary residence. I've read about people using it to sell investment property, buy another investment property, then, after renting it out for a year or so, they convert it to their primary residence. But, I'm not a tax advisor, I get all know knowledge from Bob Bruss and his Real Estate Mailbag column in the washington post You could submit your question to him
1031 Tax Deferred Exchanges are for Invement properties only. When selling a primary residence you are allowed a gain of $250,000 if you're single and $500,000 if you're married that will not be subject to capital gains tax. So unless the value of your home has increased by over $250,000, chances are you won't owe any tax on the profit.
1031 Tax Deferred Exchanges are for Invement properties only. When selling a primary residence you are allowed a gain of $250,000 if you're single and $500,000 if you're married that will not be subject to capital gains tax. So unless the value of your home has increased by over $250,000, chances are you won't owe any tax on the profit.
Property is however convertible between the forms. If you move on and convert your principal residence to a rental it has dual status for three years and then becomes entirely an investment property.
Similarly if you have an investment property that you have owned for five years and lived in two it becomes a primary residence and you can take the 250k/500k exemption. Often a very nice way to deal with appreciated property.
I have a client who owns a rental worth about 400K with a basis of about 100K. She will sell it and 1031 it into her next home. She will eventually sell her existing home taking the home owner deduction. TYhis money will be used to pay off the mortgage of the new residence. The two homes will thus have been combined into one. She will then wait five years and will have effectively realized the gain from the original rental without paying taxes. As long as she meets the ownership time requirements it is a gain she can realize every two years...basically a skilled investor can reap a 500000 capital gain deducton every two years.
I am sure this will be fixed someplace down the line when the Congress realize that a number of reasonably well off couples are realizing a 250,000 a year capital gain tax free forever. Won't really make them rich but it does not hurt...
And it does work. Have Inlaws that are now at the 1.5 million mark and continuing.
Property is however convertible between the forms. If you move on and convert your principal residence to a rental it has dual status for three years and then becomes entirely an investment property.
Similarly if you have an investment property that you have owned for five years and lived in two it becomes a primary residence and you can take the 250k/500k exemption. Often a very nice way to deal with appreciated property.
Aren't 1031 Exchanges an awesome investment/tax tool? A savvy investor can really use them to his advantage.
My take on the original post, though, was that the OP was dealing strictly with selling a primary residence and wanting to build a new primary residence. Sometimes people get confused and think they can "exchange" a primary residence or second home into another primary residence or second home. Obviously, there's usually no tax liability with a primary residence (unless a seller has been fortunate enough to have made a mega profit on their home ).
About the only way to do a 1031 exchange on a second home, though, would be to convert it to rental property as olecapt mentioned in his post.
Thanks for all of the info. Fact is, my home is almost paid for. By the time I'm ready to retire and sell it, it will be worth about $750k. I wanted to pull $250 out for retirement and take the rest and build my new home. I just had no idea how to do that. Can I take that $500k and bank it until I am ready to build? I thought I had two years but then started hearing dribbles of things about 1031 exchanges, not realizing it was for investors only. I'm not an investor. I just want to know if I can sell my property and sit on the money until I can get my plans drawn and take care of other necessities toward the build of the new home. Sorry for being so dense about this. I figured there would be loads of info coming in from those of you with experience. Thanks so much.
Thanks for all of the info. Fact is, my home is almost paid for. By the time I'm ready to retire and sell it, it will be worth about $750k. I wanted to pull $250 out for retirement and take the rest and build my new home. I just had no idea how to do that. Can I take that $500k and bank it until I am ready to build? I thought I had two years but then started hearing dribbles of things about 1031 exchanges, not realizing it was for investors only. I'm not an investor. I just want to know if I can sell my property and sit on the money until I can get my plans drawn and take care of other necessities toward the build of the new home. Sorry for being so dense about this. I figured there would be loads of info coming in from those of you with experience. Thanks so much.
The Capital Gain is basically the difference between what you paid for it and what it is worth. You get to add in costs of improvements and the cost of sales to what you paid for it. Then if you are a singe guy you get to take off $250,000 a couple 500,000. So if you paid 250K and sold for 750K and are married you owe no taxes.
At that point you can do whatever you like with the money...you can even bring it over here to Vegas and waste it on wine, women and song...or whatever.
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This is all new to me. I've only ever bought one house. Thanks.
You could submit your question to him
A savvy investor can really use them to his advantage.
