OT/Questions about taxes

I really would hate to leave this neighborhood as it is the ideal place to raise our children. But, I hate the thought of commuting 2+ hours/day for the next 27 years. (I realize this may change, but I have just completed 17 years of service in the same location so it is possible).

I am contemplating selling this place and buying a $250,000� house near my new work.

I am concerned about the tax liabilities of my possible move.

Here are my questions:
a) If I buy down like I would like to do, assuming I make $50K on this place, how much will I pay in capital gains? How can I avoid paying the tax?
b) If I buy flat or even up a little, assuming I make $50K on this place, how much if any will I pay in capital gains? How can I avoid paying the tax?
c) Is there any benefit to be had by staying here for a full 2 years, or whatever that magic time frame is for the IRS? Keep in mind that the offer to relocate with my company is only good for one year and will run out in August, 2007. That would be 6 months before we will have lived here 2 years.
d) Should we maybe rent this place out and go ahead and purchase a home in the new location to at least get the purchase incentive from my company? (I really doubt this would have much merit as we would only consider doing this to avoid the Short-Term capital gain tax). e) Any other advice is much appreciated.
Again, I always appreciate the excellent advice I receive on this site. I hope one day to get back to a farm, but for now we have chosen to dwell in the burbs.

Thanks,
David in SC

I am in SC also. What is your commute from and to?

Housing market, according to an attorney and a real estate I have just talked to, is down in much of the area with a lot of forclosures. You might have trouble selling the house. I would not buy another or move until I sold the old one.

Don't know about the rental market for that quality house, but my one experience renting to someone was not good.

Agree with the other posts about 1 hour commute not being too bad, but it depends on the route you have to take.

KEH

I hold a CPA license in the state of Washington but I find the work soul-deadening and have chosen not to practice beyond the year I had to work to get the license in the first place. My real credentials in this matter are that for about 35 years now I have bought, renovated, resold, added to, torn down, kept, moved, rented out, lived in, and most other things that are commonly done with houses. I almost always sell property w/o the services of a realtor, and buy it that way when practical. In uncomplicated transactions I sometimes write my own contracts, perform my own escrow, and have occasionally engaged in matters that probably indicate recklessness more than competence (only for myself, though; I'm never reckless with anyone else's interests---quite the contrary.)

So, having said all that, here is my take on your situation. Dug's information and advice to you is totally accurate as far as I can tell before fininshing my first cup of morning coffee. Sam Weise's information contains elements of the tax law concerning the sale of real estate---particularly your primary residence---as it was written before the major revision of 1997. Much of this no longer applies. I make plenty of mistakes, too, and I can assure you that licensed, practicing CPA's and attorneys make plenty of mistakes and give out their share of totally inaccurate advice. I've seen it on a small scale, and we've all seen it on a large scale---Enron, for instance.

One of, if not the, main reasons for paying for legal and financial advice is to have someone to hold accountable if the advice is wrong. The cost of accountability is one of the reasons that professionals charge the rates they do. Your friend or BIL/SIL who's pretty savvy can give you totally accurate advice for free, and if you're willing and able to bear the potential downside of that situation yourself it might be all the advice you need. But if it's wrong and winds up costing you money, the liability of whoever gave you that advice is probably going to be limited to telling you he's/she's really, really sorry. Someone who is licensed and charges you money for that advice is accountable for it. I did part of my internship for a CPA who, I was told, had paid out thousands of dollars for IRS penalties against a client whose work was badly mishandled by a (low paid, former) employee in that office.

Dug's math is either right, or right enough (what you actually pay in capital gain tax is more complicated than a simple 15% because other aspects of your individual return will affect it) for you to make your decision based on it. It's going to cost you about $7,500 in capital gain tax to sell the house and move. If you stay in the house for the two year total that is required for you to avoid the gain tax you lose $8,000 in move related financial help from your employer. Which is not to say that it's an easy call. If your current house is in an area that's likely to experience good appreciation and the new work location is not (different areas of the same city are sometimes clearly in this category)then your interest might be better served sticking out the commute and living in the house until you achieve tax-free resale status.

Ditto for renting. What Dug says about the problems of renting distant, high cost property is exactly the way I feel about it. Plus, it takes years to learn how to not lose money being a landlord. But...rental property appreciates, too, and having rental property can be a money generator once you learn how to do it. You defer (not avoid) capital gains tax on investment property by buying other investment property with the money you get when you sell it.

That leads into my last point. In response to your question about whether you can get out of the capital gains tax on the sale of your current house if you sell now, the answer is a qulaified yes. You can defer that gain if you buy like-kind property with the proceeds (not as restrictive as it sounds) or trade for equal or greater value like-kind property. Trading can be done through sales, smoke, and mirrors, and is not only best left to companies who specialize in doing it for you, but some elements of the tax law involved require that the money not be under your control at a certain point or you may invalidate the tax free status of the transaction. This is not meant to scare you. You are clearly intelligent, motivated and industrious. It would behoove you to learn some of these methods so that you can get your money to start making money for you.

Best of luck, Stan

I think the $500k is raised too 1mill in 2006 or is it 2008 but it's still a one time??? shot. If your not retirement age, this could bite you big time latter on.

The best place to get the correct answer is too call the IRS, 800-829-1040. On capital gains questions you most likely will have to leave your name and phone number for someone to call you back and that's a good thing as they find someone who's knows the rule very well for your question asked. From experience, forcing the answer out of who ever answers the phone will most likely not have the right answer. I find it's best to pre-write all your questions down so you don't forget any of them.

As too the one-way hour drive. The best thing we ever did was move to the county and that was one of the questions we asked to determine where we wanted to live, at least one hour out of town.

Buy a throw away cheap car that gets great fuel mileage and plan on a 5yr to 7yr replacement. One neighbor was a salesman that needed a good looking large auto (commerical realestate) so he bought two, one to make the 120 mile trip and one to use when he got to town.

I always found the extra 20min ride well worth the week-end piece and quite of country living. I say 20 min as comparring with co-workers who lived in the city and fought traffic everyday.

T_Bone

The number of times one can benefit from the capital gains exemption on the sale of primary residence is unlimited. Theoretically, one could sell their primary residence every two years and receive any capital gains tax free upto the max, $250k for singles and $500k for married couples. Prior to the tax law changes in '97, there was a one time exemption on capital gains from the sale of your primary res.

I like your idea of the "throw away" car. I have found a 3-4 year old Taurus is dirt cheap and provides reliable transportation and a comfortable ride while getting decent gas mileage. Just turned 160,000 miles on my '01 and she drives like a champ...since I said that, you will likely find me broken down on the shoulder of the road tomorrow.

Thanks for the info. Can that rule also be applied to every type of capital gains, like stocks, or is it limited to personal residence?

T_Bone

A house you have lived in for two years can be sold tax free on capital gains upto $250k for a single person and $500k for a married couple. If you fall short of the 2 year mark and sell the home, you will be taxed on capital gains at a rate of 15%.

On your new home, looks like you will make about $50k; at a 15% tax rate you will pay $7,500 in capital gains tax. Capital gains are calculated by hard costs, i.e. actual materials and hired professionals. Your hours spent on the house won't pass muster with the IRS, thus you can not include those hours as a cost basis.

Compare that to the benefits your company is offering by selling and moving now. Covering real estate fees (usually 6%), hook up fees, several hundred dollars, cost of moving, a grand or better...

It really boils down to where you want to live. An hour commute isn't bad.

Renting the house? Can you afford 2 house payments if you can't find a renter? Can you maintain the property from an hour a way, i.e. collecting rent, fixing the broken water heater, the plumbing leak, etc....Can ou collect rent when it is due??? Can you patch holes in drywall and stomach pulling out old, stinking, urine soaked carpet when the old renter moves out? Renting a house in this price range seems like a bad idea to me...

Unless there are other good reasons for staying where you are, like family close by, I'd move.

Dug

Yikes! I have a rental property, but have never seen anything that bad!!