I think that IRS requires both need to be living there for 2 out of the past 5 years in order to get $500K exclusion for a couple who file jointly. Strangely as it is, they do not need to be living there at the same time. Say, the husband could be living there in the first and the third year, and the wife could be living there in the second and the fifth year. I think IRS refers to this as the use requirement. The other requirement is the ownership requirement - most will not have a problem here if this is really their original primary residence.
Our appreciation and the accumulated equity will not be greater than $250K if we sell it today.
Also, IRS also treats the following two cases differently: 1) the primary residence turns into a rental property. 2) a rental property turns into the primary residence. They treat the case 1) more leniently as long as the owner meets the 2-out-of-5 years of âliving thereâ requirement. It makes my head spinning when I read all these rules. I probably could not remember all these rules any way, even if I understand them when I read them.
Another âbig questionâ for us is whether we are willing to sell this house at all as of today. After all, this part of our assets could be the only part which could keep its value well against the inflation in the long run. But it comes with the headache of being a landlord. Hey, we can not have the cake and east it too.
When too much of the assets are tied up with the house, I think it may not be good for the asset diversity purpose. But if only a small portion of the assets is in the house, as in our case (our house is in the fly-over part of the country, not in the expensive major cities on either coast, so its value is relatively limited), I think it is OK. But in the long run, when we really need to sell the house and the accumulated equity is high or the mortgage is paid off, we had better plan for this in order to pay less capital gain tax.
One of the articles posted two pages prior has an example like this: A person somehow can sell a house as the primary residence in one year, and two years later, he could sell another house as the primary residence. (There is another rule here that a person can not sell his house too frequently.) In the previous 7 years, he actually owns both houses and treats each of the houses as his primary residence in different years. (For a couple who may or may not jointly own the house, the rule could become even more complicated! Also, there are exceptions like moving due to jobs or health or even financial hardship or even unemployment. Who can interpret all these rules correctly?!)
The key seems to be the 2-out-of-5 rule for each of the couple and for each of the houses which is sold as the primary residence â the house could even be a rental property at the time of the sale and the house is still treated as the primary residence as far as the exclusion rule is concerned, I think.
I agree there are so many rules, it does make your head spin. I guess you really have to run the numbers, on what you expect the appreciation to be, and how much rent you think you can bring in. If you sold it and invested the cash, you could potentially get a better return with none of the hassle.
âBut in the long run, when we really need to sell the house and the accumulated equity is high or the mortgage is paid off, we had better plan for this in order to pay less capital gain tax.â
This confuses me. What does the mortgage being paid off have to do with paying less capital gains tax? The two should be unrelated. Or did I misunderstand your sentence?
^ I am concerned about the possibility that even the $250K exclusion is not enough for a house not on the coast here, assuming that only one person meets the 2-out-of-5 rules.
Hmm⊠I guess you are right. The cost basis when a house is sold has no relationship to the mortgage being paid off or not. I did not think clearly.
Re: âIf you sold it and invested the cashâŠâ
The keyword here is âto invest the cashâ. Some people (like us) just do not have the âstomachâ to invest. If I tell you that I did not lose any money in the 2008-2009 downturn (I did lose my job and this triggered the event of my relocation to another state for the job reason) and lost very little (like 1 or 2%?) of my money (both in the retirement account only â we have never invested any money in any of our non-retirement accounts), you can tell how âchickenâ our investment style has been. This is our âproblemâ â the inflation is our biggest enemy in the long run.
I try hard to cut down the amount of coffee I drink. I drink too much during weekdays so I cut down my coffee consumption during weekend.
For some reason, I find that I am interested in parent forum or parent cafe (especially the latter) on CC but is rarely drawn to elsewhere on CC.
I guess I have fully settled into my âempty nestâ â considering the fact that I have not heard from our child for the last 2 weeks. College? What thongs about college have anything to do with me now. Even the tax issue is more relevant to me than anything related to colleges/education.
Talking about all the rules to make oneâs head spin, did anyone else see the Associated Press article by Stephen Ohlemacher (in our paper yesterday with the headline âReport: 1580 IRS Workers Evaded Taxes for a Decadeâ)? They found more that owed back taxes but the delinquency was not willful (total of 18,300 cases). These are the cases that were willful. These willful are being fired, suspended or reprimanded. Only last year started denying performance bonuses to employees who willfully fail to pay their taxes. Funny how the 1998 law calls for terminations. Among their offenses: improperly claiming dependents, repeated failure to file timely tax returns, and claiming a tax credit for first-time home buyers when the worker didnât buy a house.
We do the right thing, follow the laws, dot our iâs and cross our tâs, and sleep well at night (at least about that!)
I think most on this thread enjoy peace of mind with doing the right thing, and just are working hard to figure out how to navigate to retirement, and how to live well in retirement.
@mcat2, you should probably address that phobia. Inflation has been tame, contrary to many politiciansâ dire predictions, but it would be devastating to a mostly cash portfolio if it picked up. I am really conservative, and probably leave some money on the table as a result. I think you should put at least some money in, for example, a Vanguard balanced fund (eg, LifeStrategy Conservative Growth) and add to it periodically, but donât look at the balance and donât listen to financial porn on radio, TV, neighborâs house, etc.
I have a fear of heights, so I avoid them, but I know that it hasnât materially affected my life. My wife had a public speaking phobia which she had to overcome for her job. Your investment phobia is more like the latter.
Talking about evading taxes, I wonder how George Soros is going to find a way to evade his almost 7 billion dollar tax bill that heâs been managing to avoid, by 2017. That is, if he lives that long.
I once watched a TV show about the retirement. It was said that building up the nest egg is only the half of the game. Learning how to take out the money out of the nest egg is the other half of the game. A person needs to play both well in order to retire well.
I still do not know much about the second part of the game that was referred to in that TV show. Are there really a lot to learn here? If yes, what are they?
I remember that when the first Bush (G.H.Bush) was the President, his primary residence was at a hotel room in Houston. (BTW, he did eventually retire in the city of Houston.)
If someone as rich as him plays the game legally according to the tax law, someone as âpoorâ as me had better learn how to play the game legally as well.
I actually did something right several decades ago for my 401K investment. I believed I had selected some âbalanced fundâ (60/40 for stock/bond) for at least 15 years. But I selected it just because I noticed the majority of employees selected that investment option, not because I understood what it is. Later, the more I understand the risk of investment, the more I pull the money out of the âriskyâ investment. I started to do something not very right starting around Y2K. I lost a couple of percents only during 2001-2002 downturn (i had pulled almost all into some " staple value" account by then.) I did not lose any money during 2008/2009 but also did not gain for the long period of boom after that.
I did get back into SP500 for the new money that I put into my 401K in my current job. I am in the âpower saving modeâ now, and maximize my 401K now. But I keep thinking of the 40% loss of SP500 in the 2008 downturn. But I do not invest for my previous 401K-turning-into-IRA so the exposure of my retirement savings to the equity is still low.
Recall our discussion about the 4% safe withdrawal rate.
Here is the NYTimes take on the topic, and it cites the originator of the 4% SWR, Bill Bengen, along with Wade Pfauâs study and Michael Kitcesâ take on the topic:
I would not give up a single $ of tax-free capital gains on the sale of a primary residence. There are precious few such tax âgiftsâ in the Tax Code. Were I you, I would consult a good CPA and present your facts as accurately and clearly as possible and ask how gains from the sale of your primary residence would be taxed given your facts and plan ahead, if at all possible. That would be money well spent.
No one is advocating tax evasion, which is illegal. Tax minimization or tax avoidance through the planning of oneâs transactions under current tax rules is perfectly legal.
If only one person lives there, you have to calculate the exemption for each person (up to $250K) and then add them together. Note that there are provisions that if you have to move more than 50 miles for a job, that person may be eligilble for a partial exclusion. I think I recall you mentioning that it why only one is living there? Canât rememberâŠ
So depending on the exact circumstances you may get an exclusion of anywhere from $250K to $500K.
If we sell our house now, our case is similar to a case in the link posted by AttorneyMother (I think it was on post 6320), except that only one of the owners meets the 2-of-5 residence requirement. This tax law should be taken into considerations when we decide WHEN to sell the house. (We only need $250K exclusion. We are happy if we are qualified for this much of exclusion.)
I know the time is not on our side according to this law. However, I do not think I could convince my wife that it is a good idea to sell it now, no matter what, unless I could buy a smaller, even cheaper house to replace it.
"Dave
7 months ago
Hello and thank you for your very helpful responses at this site!
I have a question regarding the Housing Assistance Tax Act of 2008 and how it may impact my Capital Gains exclusion upon sale of my property.
My wife and I owned and lived in our home from 2003 to 2013 as our primary residence. In November 2013, I moved for work and we converted our home to a rental. If I continue to rent the home and then sell prior to November 2016, will we still qualify for $500k in capital gains exclusion (because we lived in the home 2 of the prior 5 years preceding the date of sale), or will we have to pay capital gains on a % of our gains because of the Housing Assistance Tax Act of 2008 (since the property was used as a rental subsequent to Jan 2009)?
So yes, as long as you sell the property by November of 2013, all of the gain will be qualifying use, and all of the gain will be eligible for the $500k capital gains exclusion. (Though any depreciation will still be subject to recapture gain.)"
Food for thought - Stewart Welch (welchgroup.com) had a newspaper column in January suggesting 3 money-making concepts that should be part of your plan. For most of us, ideas to pass onto the kids. (1) Invest early (in life); (2) Invest early (in the year); (3) Prioritize investment contributions.
On the invest early (in the year) gave two examples of the difference over years of contributing to IRA/Roth IRA at earliest moment versus waiting until the last.
On the prioritizing investment contributions - I made the mistake of not maximizing Roth IRA opportunities/years - could have reduced 401(k) money some during that period. Have shifted IRA money to Roth IRA with a tax penalty last year and this year, but willing to pay the price for the âfixâ. Some people actually donât contribute to 401(k) to take advantage of company match.
Yesterdayâs Stewart Welch column said recent research suggests that 1/3 of people have saved nothing for retirement; 1/3 have saved less than $50,000. Only about 4 percent are on or above track to accumulate enough wealth to allow them to retire with enough money to replace their work income.
Many of us on this thread are in the 1/3 that have saved more than $50,000 and are somewhere between that and the top 4% of retirement savers. For those that have same cash stream as before retirement, congrats on job well done!
I agree that being able to âlive on lessâ can have you living on the lower money level and still living well. If no longer paying for college and/or home, can build up some savings before retirement too and also look to budgeting - save for trips you can take in retirement for example that you donât have time to take now.
Passing on being smart with money to kids can help them accumulate wealth, including using tax advantages by putting money into Roth IRA for them (and letting the money have the ability to grow (using Welchâs principle #1).
There are many things we all can do to help ourselves be better in retirement, including getting to ideal weight and being fit as one can be.
I just got around to checking the inflation rate for the next 6 months, -0.8%; another negative rate resulting in composite yield of 0%! The last time we had a negative rate was in 2009. Iâm starting to think we just donât need to worry about inflation anymore but view the I bonds as a sort of insurance.
SOS I agree with you that we need to be proactive in getting our kids to save for retirement, to the point of opening ROTH accounts for them before they quite grasp the concept.
@momsquad, we buy the $20k annual limit every year (but donât mess with the additional 20k if you have income tax refund). They have decent returns in inflationary and deflationary times, but the limit is pretty low. They are ânear cashâ after youâve held them for a few years.
Re deflation: I Bonds can never pay less than a 0.0% composite interest rate â fixed rate + inflation-adjusted rate â and the I Bondâs principal balance can never go down.
Assuming that you hold I Bonds for safety but are subject to extremely low interest rates and annual limits, is there a reason you are not looking at CD ladders for your safe stash?
