I bought a house in October and after significantly upgrading it, I am getting ready to sell it. I bought the house for $113,000 and the appraisal I had this week said it is worth $200,000. I put in about $45,000 in upgrading it. We have lived in the house for about 7 months.
I have 2 questions:
If I were to refinance the house to pull some of the equity to pay off some debts, will I pay any taxes? From what I have researched, this would count as a loan instead of income, so I should not be paying any taxes. I think I just answered my own question, but I want to make sure I understand correctly.
If I were to sell the house without refinancing, should I schedule the closing to occur AFTER the 1 year of ownership passes?
Yes, if you refinance the property and take cash out under a loan there is no taxes owed as it is loan proceeds. Now upon a sale you will need to reconsile the cost basis, expenses, cost's and fees against sales price which reveals actual profit.
Any sale occuring after 365 days is considered capital gains, less than 365 days is earned income.
Keeping the home for 2 years out of the last 5 qualifies you for taking equity tax free as an owner occupied property for up to $250k for an individual or $500k for a married couple.
So if you and your wife like the house remain living in it for another 17 months before you list it and for right now refinance and take some cash out to pay off bills and debts.
When you guy a house with the intent to rehab and sell it, this is ordinary business income, not capital gain. Holding period is irrelevant. Goes on Sch C in the year sold. Ordinary income plus self employment tax applies.
However, living in the house (as your primary residence) DOES change things. If you live in the house for 2 years, you would be able to exclude the gain from income. If you live in the home for less than two full years, you will still be able to exclude part of the gain.
Closing costs and points are deductible (add to basis) but the refi itself doesn’t change the gain/loss.
Thank you for the answers to my question so far. I just thought of another one. Let’s say I refinance the house for 80% of 200,000 (160,000). If I decide to sell it for 200,000 after that do I pay taxes on the difference between 200,000 and 160,000 (40,000) or is it calculated differently?
Do yourself a favor and live in the property for at least 2 years. As mcwagner stated, after living in the property for 2 of the past 5 years all of your profit is is free. IIRC, you don’t need to live in the property for 2 years before putting it up for sale, just for 2 years before the sale date. For example, if average DOM in your area is 90 days and typical closing period is 90 days, put the place up for sale after living in it for 1.5 years and continue to live in it until settlement. On average, by the time you find a seller and complete closing you will have lived in it for 2 years and qualify for the entire tax free profits. If you find a buyer quickly or the buyer wants a quick closing you’ll still get at least part of the profit tax free, or simply negotiate the closing date later if possible.
I am going to offer to buy you a new pair of glasses as the original poster never said anything about his intention to buy and fix & flip the house or to rehab and sell it!!
If you read it correctly he bought it intending to owner occupy it and has done significient upgrading for 5 months (October to February) then moved his family in 7 months ago!!
The truth of owner occupied home ownership is if you buy a property for any reason and resell it within 12 months (365 days) it is taxed as earned income. If you buy a home and sell it because you want to, your mom wants you to, your wife wants you to, or your dog wants you to and it is beyond 366 days but less than 730 days then your sales proceeds are capital gains.
If as an owner occupied home you live in it 2 years out of 5 years to which it does not need to be consectutive then you qualify for the owner occupied tax exclusion.
I did not know I made any statement of use when buying homes?
I would like to apologize for the confusion I caused with not clarifying my intent. My intent was to buy a house with a potential and flip it. Things changed, however, and we moved into the house to live in it while finishing up the last projects. When we get ready to sell it, what kind of taxes are we going to pay?
I decided to give you a quick update regarding this property. I also have a new question that will be better suited in another forum, but I do not want to open a new topic and clog the forum.
I refinanced the property and use the equity to pay some of the loans I took to remodel the house.
The house appraised for $195,000 and after covering for the previous mortgage and paying off some debts, I ended up with a little over 12,000 to put in my bank account.
I have never sold a property with owner financing, but you can see that the trade-off for a bigger down payment is a lower interest rate and a savings of almost $200 for the buyer.
My question for you, real estate masters, is am I being too conservative with my terms and how would you structure the deal?