Question

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

Forum|Forum|3 years ago
April 30, 2023
1 reply
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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.

M

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.

R

rlwremo42Author

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.

Carl11_2

Employee

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.