Re: Capital Gaines Question
The IRS provides for a Capital Gains 'rollover', where potential CG taxes due on the sale of a house can be 'rolled over' into the purchase of a yet more expensive house. There are some limitations to the 'rollover' ability, and I'm not sure of the details, but your $250,000 figure sounds reasonable.
However, if you sell the 'last' house and do not purchase another yet more expensive house to replace it, then CG taxes will in fact come due on the proceeds of not only the 'last' house sale but all of the gains on previous houses which were 'rolled into' the last one. If you have been flipping houses every few years, then the CG tax due on the sale of your 'last' house will essentially encompass the entire sale price less the original price you paid for the very first house you ever bought. Even so, CG tax rates are much lower in percentage terms than ordinary income tax rates.
I believe that there is also once in a lifetime CG exclusion available with certain age limitations, which is primarily targeted to benefit homeowners selling out just prior to retirement age, but again I'm not sure of the details.
Re: Capital Gaines Question
Thanks Mel - I am going to read up a bit on this as well but your information is very useful .
Re: Capital Gaines Question
Not so fast.
The exclusion applies to your principle residence, not just any house.
From http://www.irs.gov/businesses/small/...=98921,00.html
Quote:
You may qualify to exclude from your income all or part of any gain from the sale of your main home. Your main home is the one in which you live most of the time.
Ownership and Use Tests
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:
- Owned the home for at least two years (the ownership test)
- Lived in the home as your main home for at least two years (the use test)
Living in a house for 2 years is not within my definition of flipping a house. This is not a "get out of taxes free card."
Re: Capital Gaines Question
Thanks Monty- I read the article and I get it now they really have it covered well in the IRS page . I see a lot of flipping lately and I must say you better have a fat wallet to begin with because you must first have the capital to make any repairs and remodeling to raise the value , and also if it doesnt sell rite away you are stuck with a mortgage payment . Although the profits can be lucrative I am worried about the risks involved . I am always looking at ways to make money however I think this would have too much capital just hanging out there - I will stick with my stocks for a while .
Quote:
Originally Posted by montythegeek
Not so fast.
The exclusion applies to your principle residence, not just any house.
From
http://www.irs.gov/businesses/small/...=98921,00.html
Living in a house for 2 years is not within my definition of flipping a house. This is not a "get out of taxes free card."
Re: Capital Gaines Question
If you were considering 'flipping' real estate as a purely speculative venture, you'd also be facing the possible risk that the real estate markets in 'hot spots' like Phoenix is topping out. Thus it's entirely possible that, a few months from now, you may not be able to actually find a qualified buyer willing to pay a higher price for your spec house than you did. This could leave you (and thousands of other 'hot spot' homeowners) trapped in a dilemma, with capital invested in the house, with mortgage and property tax payments coming due, with a rental market that won't quite cover the mortgage and property taxes, and with 'saleable' real estate pricing levels which would result in you taking a loss versus your original purchase price.
Re: Capital Gaines Question
You can 'swap' any property to dodge taxes if I remember correctly.
Re: Capital Gaines Question
What Melonie said is, of course , true. It is always true, but people are under the illusion that it is not just because prices in almost al markets have risen in the past 5 years by double-digit percentages per year.
People had a similar perception that an investment was a one-way bet in tech stocks in the late 1990s. they thought the same was true of oil in 2005. They thought the same was true of avon and Kmart in the 1960s. The fundamental error is to ever think an inherently risky activity is risk-free.
Melonie also forgot to to mention that an investor on borrowed money still has to pay back the money even if the investment goes in the toidy, with zero income earned once the property is foreclosed on or sold off voluntarily. The borrower is just left with the remaining debt. If you have the cash and invest in a property you may loose some of that equity and still get out with no residual debt, or seat equity might be at sub-minimum wage rates. If you leverage, you might just end up with the debt if it goes sour.
Re: Capital Gaines Question
Quote:
Originally Posted by lunchbox
You can 'swap' any property to dodge taxes if I remember correctly.
Only on income property where there is no gains exclusion and it only defers taxes on gains. You could end up deferring gains until you end up in a higher tax bracket.
Another delusion-deferring taxes is not always the optimal choice. A case in point, a newly minted student gets a job from 7/1 to the end of year. Year 2+ is at higher, full-year rates. The tax rate is much lower for that tax year than it will be 40 years later when IRA money is coming out. Then use a Roth IRA, wher the money goes in after tax and gains are allowed to compound without extra taxes due.