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jim-strine-gmail
New Member

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?

For example, future buyer puts down $150,000 on a $300,000 sale price in 2021, but cannot complete the sale until 2022 at which time another $150,000 is paid. Can my income be spread across 2 tax years and still be exempt from capital gains?
12 Replies
Carl
Level 15

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?

The $150K down should be put into an escrow account with an escrow agent, meaning that you can't get it until you close on the sale, or the buyer doesn't follow through with the sale. Then it's not reported as income until the tax year you actually close on the sale.

What the down payment does it take the property off the market with a guarantee that you will sell to the prospective buyer and no one else. Then depending on the terms, if the buyer backs out of the sale it's usually a case of where the buyer sacrifices their down payment (or a portion of it). The sacrificed amount is reported as income to the seller in the tax year the buyer backs out and the escrow agent releases the money to the seller.

 

Critter-3
Level 15

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?

If the deed will not change hands until the sale has been completed then you only report the sale in the year of sale not the year you get some escrow money.  

Mike9241
Level 15

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?

the sale is not final until closing. normally I would regard the down payment as a deposit but see the last paragraph below. the full sale will be reported in the year of closing. if you own and occupied the residence for any 2 years out of 5 years before the date of sale you get a $250,000 ($500,000 if married)  exemption on the gain. there are partial exemptions available if you meet certain rules if the 2 out of 5 rules are not met. the exclusion applies if the home was never a rental while you owned it. if it was other rules apply. also I'm assuming the residence is in the US.

 

 

not sure if any potential buyer would make such a large down payment. there might be something involved that could make part or all of the $150K taxable in 2021.   consult a lawyer.

 

ZTaxPro
Level 4

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?

If the down payment goes to an escrow account that you don't have control this sounds like an incomplete sales. You should wait until you collect funds to report the sale. It is possible that there is a complete sale if you are agreeing to receive some money now and some money later. This would be reported as an installment sale on your taxes. You calculate the gain including all proceeds of the sale and then only recognize the percentage you received this year. In future years you recognize the percentage collected.

 

There is also the home sale exclusion to take into account. It is possible that if the exclusion excludes the entire gain that you report nothing on your return for any of the years.

jim-strine-gmail
New Member

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?

I just looked at IRS Pub 537 for installment sales. It states "An installment sale is a sale of property where you receive at least one payment after the tax year of the sale." In this case, the money would be paid this year, and the sale finalized next year. That would make the tax year of sale 2022. Do I understand correctly then, that this would not be considered an installment sale?

jim-strine-gmail
New Member

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?

That is an interesting comment at the end of your post. Many homes have been bought in the area for cash over the past two years. What is it about a down payment of $150,000 that stirs suspicion?

Critter-3
Level 15

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?

@jim-strine-gmail 

 

Ok... this will all depend on what this large "down payment" really is ... is it going into an escrow account where it will be held until  the final sale ?     Or is this a final sale with an installment payment ?   When does the deed actually change hands ? 

 

A payment you can spend before the sale is final is most unusual so that is why it is being questioned ... so please seek legal assistance locally.  If they are letting you have this large payment now and a final payment later sounds like possible real estate fraud or a case of reselling which may be illegal.  

tagteam
Level 15

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?


@jim-strine-gmail wrote:

What is it about a down payment of $150,000 that stirs suspicion?


The fact that it is fully half of the total purchase price. 

 

Earnest money is typically nowhere near 50% of the purchase price of a piece of property. It is more in the range of 5-20%.

 

You really do need to consult with a local professional.

jim-strine-gmail
New Member

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?

It was my primary home, so I don't think any real estate fraud is intended. But is there something I don't know that could construe that? Hopefully that also answers the reselling; I can only sell it once. I just started renting to the buyer this year; they would prefer to pay all in cash, but don't have the entire amount now. Is there something illegal about this?

Critter-3
Level 15

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?

Once again this has everything to do as to when   the  deed will  actually change hands.     

 

If this will happen in 2022 then you report the entire sale in 2022. 

 

What you have right now sounds like a "rent to own" situation on which you should have an attorney approved contract in place and the "down payment" along with any other "rent to own" payments should be placed in a trust account (AKA an escrow account ) in case the  sale falls thru.  

tagteam
Level 15

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?


@jim-strine-gmail wrote:

Is there something illegal about this?


There is nothing illegal about your transaction, but it is starting to appear as if this is a contract for deed.

 

In that event, sellers generally report such transactions as an installment sales. 

 

State laws vary on these transactions so you might want to consult with local legal counsel.

Critter-3
Level 15

If I sell my primary home next year, but take down payment money this year, do I lose the exemption from capital gains on money accepted in either year?

And the fraud suspicion would be on the buyer not you the owner ...  large cash payments are indicative of possible money laundering situations or illegal activities.  Have you never heard of "grow houses"  or  "resale" fraud schemes.   So all we are saying here is make sure you have a legally binding contract in place so you  CYA. 

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