Capital Gains Tax on Home Sale

[nthompson406]

I recently got a job about 60 miles away from my previous one.

We have owned land since 2017, moved to a trailer in 2020 on it, finished our house on the land January 2022. 

When does the 2-year window kick in for conversion of short term capital gains to long term capital gains? Is it on the completion date of the house (and not sure what qualifies as the completion date as county final inspection was delayed), refinancing date from construction to permanent, or some other date?

[NCperson]

@nthompson406 - you are mixing up two separate rules.

1) you are eligible for a tax exemption on the capital gain if you lived in the home at least 2 of the last 5 years.  In your case, you would be eligible for a pro-ration of that exemption, assuming you sell the home before the two years has gone by and you move to a different city due to a required job change.  The capital gain is the selling price less the purchase price less the selling costs less any improvements made after you purchased the home.  Then from the result you can reduce the gain by the prorated exemption.  The clock on this rule begins when you are LIVING (i.e. sleeping) in this home) 

2) there is short term capital gain if you owned the home for less than 1 year or a long term capital gain if you owned the home for more than a year.  I'll ask others to weigh in on when the clock starts

@Carl 

[Carl]

When does the 2-year window kick in for conversion of short term capital gains to long term capital gains?

The 2-year windows has nothing to do with the type of gain - be it long term or short term.

Completion date of the build really has nothing to do with this. If you lived in the house as your primary residence for at least 2 years (730 days) of the last 5 years you owned it, then you can exclude up to $250,000 from taxable income if filing single or $500,000 if filing joint and you both lived in the property as your primary residence for the 730 days.  The day count starts the first day/night you move in/begin sleeping in the house.

In your case, since you had to move for a new job before living in the house the full 730 days, that's one of the allowed exceptions. You will get a pro-rated amount to exempt, based on the time the house was your primary residence.

Short term gain - when you sell the property and you owned it less than one year. This has nothing to do with the time you lived in the property. It has everything to do with the period of time you owned it.

Long term gain - if you owned the property for more than one year.

Both short term and long term are determined by counting back from the closing date that you sell the property. Again, neither short or long term gain has nothing to do with how long you lived in the house. It has everything to do with how long you owned it.

Don't know if this will affect you or not. But be aware that it's perfectly possible for the land to be long term gain, and the house to be short term gain. Your original closing date on the land is easy, as that's the date you closed on the purchase of that land.

What I'm not sure of, is the ownership start date for the house. I would expect that date to be the date your construction loan was converted to a mortgage, or the closing date of the mortgage on the structure if you used a separate mortgage to pay off the construction loan. Others reading this will need to confirm this.

[rjs]

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@nthompson406 wrote:

I recently got a job about 60 miles away from my previous one.

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The distance between the old job and the new job doesn't matter. In order to be eligible for the partial exclusion of gain (what NCperson called the prorated exemption), the distance from the home you are selling to your new job has to be at least 50 miles more than the distance from the home to your old job.

IRS Publication 523, Selling Your Home, explains all the rules for the exclusion of gain.

[Hal_Al]

I'm of the opinion that you have a long term gain. You owned the land more than one year and the house is an "improvement with a life of more than one year". 

I'm also of the opinion that your time in the residence, for purposes of meeting the 2 year rule or calculating the reduced maximum home sale exclusion, is measured from when you moved into the trailer, on the property.

[nthompson406]

Thank you everyone for the replies.

I realize I did mess up on some terminology, but the big thing was when the clock started ticking. Most of the appreciation has been just on the land itself, rather than the structure.

@Hal_Al I would hope so, and thanks for the terminology. Gives me something additional to search for in the IRS rules.