Capital Gains Exemptions

[Agalvez494]

Hello, my husband and are selling our home and purchasing a new one at the same time. We have only had our home for 1 year and 7 months and want to put all sale profits into the purchase of the new home. We out grew our current home and are starting a family. I was told to ask a accountant if we would get taxed on the gains of the sale at the end of the transaction since we’ve lived in the home for less then two years. 

Are there any exemptions to not getting tax since we are upgrading the size of the home and putting the money into the new home purchase? 

[Bsch4477]

You would owe tax on the capital gain. There is no tax exemption for using the proceeds to buy another home. 

[Mike9241]

you may be able to use facts and circumstances to satisfy one of the three acceptable reasons for the sale to obtain a partial exclusion.  assuming you both occupied this home as your principal residence for 19 months in the 2 years ending on the date before the sale you could qualify for an exclusion of 19/24 of $500,000. this assumes that neither of you has used the home sale exclusion on another home in the 2 year period ending on the date of sale of this one. 

factors that may be relevant in determining the primary reason for sale include the following IRS REG 1.121-3(b)

the suitability of the property as the taxpayer's main home materially changed (unforeseen circumstance). 

the 3 acceptable reasons are

1) change in place of employment. the new place of employment is at least 50 miles farther from the taxpayers' old home than the former place of employment was.

2) health

3) unforeseen circumstances.  

I certainly would recommend that you consult with a tax pro in your area to go over your situation. "unforeseen circumstances" is at the discretion of the IRS should they inquire. in other words, would the IRS deem starting a family being an unforeseen circumstance.   many families live in cramped quarters. 

another thing to consider is what will your gain be? depending on your overall tax situation in the year of sale the gain could be taxed at 0% for federal. if your state has an income tax there could be state taxes.  

[Critter-3]

Since you bought not long ago you may not have much gain to report.   The  purchase price + cost to buy + cost to sell + any improvements = your cost basis.     Sales price - cost basis = profit or loss     Loss is not deductible but the gain is taxable and since you owned for more than 1 year it will be long term cap gain which is taxed at a lower rate.  

[Opus 17]

The taxability with your gain has nothing to do with what you plan to do with the money after, they are two separate transactions.

If you have unforeseen circumstances that create a financial hardship, you can claim a partial exclusion.  This is based on the number of days divided by 730 (number of days in 2 years).  Your exclusion would be the shortest of 

1. the number of days you owned the home
2. the number of days you lived in the home as your main home
3. the number of days since you last used the exclusion.

So for 600 days of ownership, you could exclude 600/730, or 82.2% of the usual $500,000 exclusion, which would be $410,000.

To qualify for the partial exclusion, you need to show unforeseen circumstances that create a financial hardship.  There are some specific safe harbors (situations) that qualify, but situations not specifically listed may also qualify.  If you claim the exclusion, you don't send proof of your circumstance with your return, but keep the proof for 6 years in case of audit.  The partial exclusion rules are described in publication 523.

https://www.irs.gov/pub/irs-pdf/p523.pdf

[Hal_Al]

"Planning" a family does not appear to be an exception to the 2 year rule.  Actually getting pregnant does.  Reference:  http://www.journalofaccountancy.com/Issues/2009/Nov/20091783.htm

How much capital gain are you expecting?  For people under a certain income level (roughly $106K for Married jointly), a portion of the capital gain is not taxed (technically taxed at 0%).

Example*: couple has $80K income and expects $40K capital gain on home sale of less than 2 years.  $26K (106K - 80K = 26K) of the gain will be tax at 0% and $14K taxed at 15%. 

*Example assumes couple uses standard deduction.  Tax will be less for itemizers.