Can I roll over the profits from my second home straight to building our new primary residence without paying capital gains?

Forum|Forum|5 years ago
September 7, 2020
10 replies
87 views

We currently live in a manufactured home on 10 acres. We bought a second property in town and are fixing it up. We would like to use the profits from our second property to help build our forever home on the 10 acres we have and would eventually sell our manufactured home and replace it with our new build for our primary residence. We would like to avoid capital gains at all costs.

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Best answer by DoninGA

@lizgordon wrote:

I thought there was a process in which if we rolled over the profits within so many months to another investment we could avoid capital gains on the second home.

If the second home was an investment property and not a personal residence then you can do a 1031 exchange to a like kind property.

See this IRS website - https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips

Also review this website for like-kind exchange rules - https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx

DoninGA

Level 15

If you have capital gains on the sale of the second home, those gains are taxable regardless of how the gains are used.

lizgordonAuthor

Level 2

I thought there was a process in which if we rolled over the profits within so many months to another investment we could avoid capital gains on the second home.

DoninGA

Answer

Level 15

@lizgordon wrote:

I thought there was a process in which if we rolled over the profits within so many months to another investment we could avoid capital gains on the second home.

If the second home was an investment property and not a personal residence then you can do a 1031 exchange to a like kind property.

See this IRS website - https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips

Also review this website for like-kind exchange rules - https://www.investopedia.com/financial-edge/0110/10-things-to-know-about-1031-exchanges.aspx

Carl

Level 11

Can I roll over the profits from my second home straight to building our new primary residence without paying capital gains.

Simple answer is NO. Period. End of story. The ability to do that expired 10-20 years ago. It was commonly referred to back then as a capital gains deferment.

If the property you sold was your *PRIMARY* residence for at least 731 days of the last 1,826 days you owned it, counting backwards from the closing date of the sale, then you could qualify for the capital gains tax exclusion of $250K if single, or $500K if married filing joint and you were both listed as owners on the deed. Note that the days it was your primary residence do NOT have to be consecutive either.

But since you specifically and explicitly state it was your "SECOND" home, if that's true for the last 5 years, you do not qualify for any exclusion.

If the property was a rental property for "ANY" period of time while you owned it, then you have depreciation recapture to deal with. If you don't know what you're doing, that *WILL* complicate matters for you. (But TurboTax can handle it just fine *if* you know what you're doing.)

For a 1031 exchange you are required by federal law to complete the transaction with a 3rd party professional qualified to complete such exchanges. There are time limits also, between the time of disposing of the old property, and acquiring the new property. But I don't see a 1031 exchange as even a possibility here, since your purchase was for land only. You specifically and explicitely state that you are "building our new primary residence" which indicates you sold real estate with a structure on it, and purchase real estate without a structure on it - raw land. I just don't see any possibility of getting a house built with a CO issued within the 1031 exchange time frame required by law.

Anonymous_

Level 15

@Carl11_2 wrote:
.....you could qualify for the capital gains tax exclusion of $250K if single, or $500K if married filing joint and you were both listed as owners on the deed.

For a married couple filing jointly, only one spouse has to meet the ownership requirement. Each spouse must meet the use requirement, however.

@Carl11_2 wrote:

....I don't see a 1031 exchange as even a possibility here, since your purchase was for land only.

A 1031 exchange can be done with land so that is not the issue. The issue is that the property must be held for productive use in a trade or business or for investment to qualify for a 1031 exchange.