This Week's Q & A

Q: I’m having trouble understanding the capital gains tax implications of two home sale transactions I am contemplating. A 30-minute session with IRS representatives did nothing to clarify my understanding of the issue. Perhaps you can help. I am 65 years old, currently living in my primary residence, which I purchased 30 years ago for $25,000. I plan to sell the house in 1999, and expect to price it at about $250,000. I also own a vacation property on Cape Cod, which I purchased for $11,000, and which currently is valued at about $100,000. I’m hoping to sell this property next year, and purchase a home that costs at least $100,000 and probably more than that. My questions are: 1) When I sell my primary residence in two years, what (if anything) will I have to pay in capital gains? 2) How much (if any) of a capital gains tax will I face on the sale of my Cape Cod home? 3) Will there be any penalty imposed if I sell both houses within a one-year period?

A: Let’s take these transactions one at a time, and then put them back together and see if we can’t come up with a somewhat more advantageous strategy for you. Let’s start with your primary residence. You can exclude up to $500,000 of the gain ($250,000 if you file singly rather than jointly) from the sale, and there is no requirement (as there was under the old law) that you purchase a replacement residence worth as much or more than the one you’re selling. If your numbers are accurate, even using the single-taxpayer rule, you will be able to exclude all of the gain you realize on this sale.

Your Cape Cod residence is not your primary residence, and so it does not qualify for the capital gains exclusion. When you sell this property, you will be liable for the entire gain, adjusted for capital improvements, selling expenses, etc.

As for your third question, there’s no penalty, per se for selling both houses within a one-year period, except for the self-imposed tax penalty that results from structuring these transactions as you are proposing. If taxes are a major concern, why not consider selling your primary residence first, since that will qualify right away for the gain exclusion, and you’re under no compulsion to buy a replacement residence immediately – or ever. You’re also allowed to claim the exclusion as often as every two years. So, you could occupy the Cape residence as your primary home, live there for at least two years (thereby satisfying the requirement that you occupy a home for at least two of the five years preceding the sale) and then claim the exclusion and eliminate your tax liability on this sale, too. There may be compelling reasons, which you didn’t mention, for the timetable you described. But the new tax law provides a much less costly avenue, which you should consider.

These transactions probably have long-term financial-planning as well as short-term tax implications for you. So you should consult an accountant, an estate lawyer, or a financial planner, to make sure you consider all the relevant issues before you proceed.