Betting on the house: Rules for property sales
Real estate agent Shelley Bridge vividly recalls how a love affair once cost a young man more than $20,000 in federal taxes.
The man, with Bridge’s help, had previously bought a house for around $200,000. Having fallen in love several years later, he moved in with his girlfriend and put his house up for rent.
Three years passed. He decided it was time to sell his house – now worth roughly $350,000 – and contacted Bridge, owner of a Re/Max office in Denver. Knowing about his living arrangement, she asked how long it had been since the house had been his primary residence. "Three years last month," came the answer. “Oh, you just missed the window,” she informed him.
Because of his three-year absence, he would have to pay tax of more than $20,000 on the sale, because of the appreciated value of his home. Had he sold the house a month earlier, he would have only owed tax on the profit equal to the depreciation he deducted (or should have deducted) in the years in which he rented out the house.
Knowing the tax laws – in this case, that if you live in a house for two of the previous five years, you owe little or no taxes on its sale – can make a considerable difference in the tax picture when you sell a building, whether it’s your residence or property that was previously your residence.
The man in this example could have moved back into the house for two years and sold it with a much smaller tax burden, but his girlfriend, now his wife, wasn’t up for it.
Although timing can affect the taxes you owe, taxes generally shouldn’t be a main consideration in selling real estate, said Ron Schumacher, a Denver accountant and tax preparer who also owns 12 commercial buildings and one residential rental property. Taxes, Schumacher said, “are just part of the puzzle.”
“Most people can fit the requirements to exclude gains from taxable income,” says Mark Levine, director of the University of Denver’s Burns School of Real Estate and Construction Management.