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

[lizgordon]

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.

[DoninGA]

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

[lizgordon]

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 · Accepted solution]

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@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. 

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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-ti...

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

[macuser_22]

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@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. 

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The ability to defer capital gains tax on personal residence property by using the money to purchase another home went away about 10 years ago with a tax law change.

A 1031 exchange is the only method now and that would not apply to you situation (using the money to build a personal residence).

[Anonymous]

the provision you are thinking about was repealed in 1997 and never applied to a second home.

[Critter-3]

Form 2119 was discontinued by the Taxpayer Relief Act of 1997. Since that time, you can not defer capital gains on a home by buying one of equal or greater value. What you can do, if you owned and lived in the home for 2 of the 5 years ending on the sale date, is to not have to pay tax on a gain of up to $250,000 (Single), or $500,000 (Married Filing Jointly). Note that if you ever used the home as a rental, then the exclusion does not apply to any gain equal to the depreciation that you claimed or could have claimed.
For further info, see IRS Pubs, 530, 523, and 17
http://www.irs.gov/pub/irs-pdf/p530.pdf
http://www.irs.gov/pub/irs-pdf/p523.pdf
http://www.irs.gov/pub/irs-pdf/p17.pdf

[Anonymous]

a second home as-is is not investment property.  so if you wanted to avoid tax on the gain you would have to convert it to investment property and then do a 1031 exchange.  that usually means converting it to rental.  many pros say that the rental would have to be in place for 6 months to a year since there is nothing specific in the code or regs. too short and the IRS could deny 1031 treatment making the entire transaction taxable when the proceeds are now tied up in the other real estate. after the lease expires do a 1031 exchange - see a lawyer you'll need one.  the issue you could have with that is to avoid gain completely you can get no cash out on the 1031.  Any cash out would be taxable boot.  then too there could be taxable boot if the mortgage on the replacement property is less than that on your second residence.  Also, you would now have investment property with your cash tied up and not available to use for the new residence.   

[tagteam]

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@Anonymous wrote:

....convert it to investment property and then do a 1031 exchange.  that usually means converting it to rental.  many pros say that the rental would have to be in place for 6 months to a year since there is nothing specific in the code or regs.....

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However, Rev. Proc. 2008-16 provides a safe harbor where the period of qualifying use (for both the relinquished and replacement properties) is 24 months.

[Carl]

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.

[tagteam]

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@Carl 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. 

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

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@Carl wrote:

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

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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.