reinvesting proceeds from sale of 2nd home to improvement value to avoid payig property gains tax,

[rlwremo42]

Hi.  

I live in Florida (been here 10 years) and this has been my primary residence.

In 2021, I bought a 2nd home / vacation home.  This 2nd home has never been rented out or anything like that. The primary purpose of buying it was to have a guaranteed evacuation spot in case a hurricane was going to bear down on us. Secondary purpose was t go up to it and enjoy the great food in the area along with the pool at the community.

So my question is, can I use the "gains" from the sale of the 2nd home  / vacation home to make improvements to my primary residendce and avoid payiing capital gains om those gaints.

Thank you!!

Richard.

[Mike9241]

No. the tax law that allowed deferral of gain on the sale of primary residence by using the proceeds to buy another primary residence hasn't been in effect since 1997.  so any gain on the sale of your second home will be taxed. using the proceeds for improvements to your primary home will add to its cost basis which may help reduce any taxable gain when it is sold. 

[rlwremo42]

One aspect of this I didn't mention is that my spouse is terminally ill.  She is the one who wanted to buy the house.  Once she passes I plan to sell it at some point (not immediately).  I did come across an article on nerdwallet.com that indicated death of a family member that was an owner of the house was a qualifying factor and may result in having "some or all" of the capital gains excluded.

Obviously this will all be complex and I will need a tax advisor that specializes in estate management. 

[Carl]

Bottom line: Gain realized from the sale of real estate are flat out not deferrable. Period.any property improvements you do to your home just add to the cost basis of that home. However, that is not reported anywhere on your tax return until one of three things happens in your life.

1. You convert the property to a rental or some other type of business use.

2. You sell the property.

3. You die.

So until such time, all you do is file all paperwork related to the property improvements with the closing paperwork you got when you originally purchased/acquired the property. That way, you will have it when one of the above three things accurs, as you won't need it until then.

I did come across an article on nerdwallet.com

One has to be careful with information from 3rd party sites. Often, the information is outdated or just flat out wrong.  IRS publication 523 at https://www.irs.gov/pub/irs-pdf/p523.pdf is the most current publication available that covers all the rules and exceptions for selling your home. It's important that you familiarize yourself with the "Eligibility Test" section starting on page 3 of that publication.

As for exclusion of capital gains, that's a completely different unrelated thing. If, when you sell the property, it was your primary residence for at least 730 days (2 years) of the last 1826 days (5 years) you owned it, counting back from the closing date of the sale, then a set amount of capital gains is excluded from taxation. A max of $250,000 if filing single, and a max of $500,000 if filing Married Filing Joint. There is also a provision for MFJ that if your spouse dies, you have a maximum of 2 years after their passing to sell the property and still get the full $500,000 exemption.

[rlwremo42]

Thank you for the reference to that IRS publication.  There is a lot there and I see more than one scenario around medical and death that could be applied to my situation. 

I will make sure and have that article handy when I start working with a tax / estate advisor.

Of course, depending on how the market is, I may just bite the bullet, sell it and pay the taxes and then just forget about the whole thing. Whatever the taxes are won't be as bad as the monthly mortgage and HOA fees are on a house we can't use anymore (including her not being able to travel there due to her medical condition).

Thanks!

[Opus 17]

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@rlwremo42 wrote:

One aspect of this I didn't mention is that my spouse is terminally ill.  She is the one who wanted to buy the house.  Once she passes I plan to sell it at some point (not immediately).  I did come across an article on nerdwallet.com that indicated death of a family member that was an owner of the house was a qualifying factor and may result in having "some or all" of the capital gains excluded.

Obviously this will all be complex and I will need a tax advisor that specializes in estate management. 

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Sorry, no.  There is never any special treatment on the capital gains from sale of a second home.

When you sell the home that has been your main home for at least 2 of the past 5 years, you can exclude the first $250,000 of capital gains if single or head of household and $500,000 if married filing jointly.  If your spouse dies, you can still claim the full $500,000 exclusion if you sell within 2 years of their death.  (After that, you are only entitled to the single $250,000 exclusion).  But this only applies to your main home, not your second home.

[tagteam]

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@rlwremo42 wrote:

......when I start working with a tax / estate advisor.

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My only input here is you should absolutely start working with that advisor prior to selling the second home.

[Critter-3]

There is the situation of the step up in basis at death of a jointly owned property which could save you some in cap gain taxes ... this is not the same thing as the personal residence exclusion.  Please talk to a local tax professional be be properly educated in this matter.  

[Opus 17]

@rlwremo42 

The issue of stepped up basis is really important and sorry I forgot to mention it.  

In general, if you bought your home with your spouse, the IRS looks at it as though you each own half.  When your spouse dies, you inherit your spouse's ownership interest with a new basis equal to the fair market value on the date they died, your basis is "stepped up."

For example, if you purchased the home for $100,000, each of you has a basis of $50,000 in your half of the home.  Suppose that on the day your spouse dies, the home is worth $250,000.  Your spouse's half is worth $125,000 and you receive that stepped up basis when you inherit their half.  So your total basis is $50,000 for your half and $125,000 for the inherited half, equals $175,000.  That means that if you sell for $200,000, your capital gain subject to tax is $25,000 rather than $100,000.

I'm sorry for the situation you find yourself in and you have our sympathy.  You may want to hire a financial advisor of an elder law attorney to help manage your finances around this difficult time.   (I say elder law attorney because they specialize in end of life situations, even if you are not elderly.)  There are steps you can take to improve your financial situations and there are mistakes you need to avoid, and an emotionally difficult  time is when you need an expert to help you out.