How to Legally Avoid Capital Gains in Utah?

Question

We live in Salt Lake City, Utah and we bought a house a little over a year ago as our primary residence. We will be selling it for a profit that will put our annual income well over $80K for the year but want to make sure we keep as much of the profit as possible rather than pay a crazy portion of it to capital gains taxes. Does anyone have tips or recommendations on how to use the profit we've made to legally avoid paying capital gains? We are planning to use some of the profit to repair our new primary residence which will have a basement that we'd rent out.

Thanks for any suggestions you have!

Clayton Mobley · Answer

@Trevor Carver It sounds like maybe you're concerned about the $500k Sec 121 capital gains exemption because you haven't lived in the current prop for two years or more? Since I don't know the specifics of why you're moving, I thought I'd just throw in some info on the possibility  of a partial exemption. In some cases, you may be able to take an exemption equal to the percentage of the normal two-year period that you did live in the property. So, in your case, you lived there 12 months out of the required 24, so you could take a 50% exemption (or 250k tax-free since you're married filing jointly).

Of course, the IRS doesn't just give this stuff away. The reason for your move has to fall into a few specific categories, but if you're moving because of your job and the new place is more than 50miles away, or if you're in the military and are being reassigned, then you're in with a decent chance at least. You would DEFINITELY need to talk to a tax pro before you make any assumptions, and you'd need to be able to show that the event causing the sale was 'unforeseeable' etc,  but there are potential options out there if you need to sell the property before you hit the 2-year mark.

Here's the IRS Pub on the topic: https://www.irs.gov/publications/p523/ar02.html#en...

You can find the exemptions by navigating via the table of contents at the top. Under "Does Your Home Sale Qualify For Maximum Exclusion" heading, click the "Does Your Home Qualify - Details and Exceptions" link.

And here's another break down of the Exceptions to the normal two-out-of-five-years qualification test, including a little example of how the math works if someone has to sell before living in a prop for two years:

http://www.journalofaccountancy.com/issues/2009/no...

It's possible none of this will apply to you, but just in case it does - there may be light at the end of the tax-free tunnel!

Best of luck!

Clayton

Rebecca Belnap · Answer

@Trevor Carver You were right first.  You must live in the home for 2 of the last 5 years to not have the gain.  At 2 years and a day, you are fine.

Chris Potter · Answer

@Tanner Christensen and @Trevor Carver, regarding long-term capital gains taxes (gains on properties that have been held at least 12 months), there are 3 different tax rates for long-term capital gains depending on how much ordinary income you show.  Yea taxes are not simple on any level.  Here is a good links that explains it:

https://www.irs.gov/taxtopics/tc409.html

The tax rate on most net capital gain is no higher than 15% for most taxpayers. Some or all net capital gain may be taxed at 0% if you're in the 10% or 15% ordinary income tax brackets. However, a 20% tax rate on net capital gain applies to the extent that a taxpayer's taxable income exceeds the thresholds set for the 39.6% ordinary tax rate ($415,050 for single; $466,950 for married filing jointly or qualifying widow(er); $441,000 for head of household, and $233,475 for married filing separately).

There are a few other exceptions where capital gains may be taxed at rates greater than 15%:

• The taxable part of a gain from selling section 1202 qualified small business stock is taxed at a maximum 28% rate.
• Net capital gains from selling collectibles (such as coins or art) are taxed at a maximum 28% rate.
• The portion of any unrecaptured section 1250 gain from selling section 1250 real property is taxed at a maximum 25% rate.

As you can see, most people are taxed at 15% on long-term gains.  I had a situation on my '15 taxes where I had some roll-over passive losses from rental properties that had been accruing for years and my CPA could finally apply them when I sold some rental properties.  It ended up being close to $100k in losses which could be written off.  That put my ordinary income so low that he was able to tax my long term gain income at the 0% rate, and I had quite a bit in long-term gain income.  I basically won the IRS lottery that year.  I wasn't so lucky last year...

Dave Foster · Answer

@Trevor Carver, @Rebecca Belnap nailed it.  You need to have resided there for 2 out of the 5 years prior to the sale.  So you obviously in your last 12 months necessary.

A normal closing for a sale is probably what- 2 weeks to a month for marketing and contract and 60 - 90 days to close?  So that adds 3-4 months on your total. You've got to be close if you factor those time lines in.

Dave Foster · Answer

@Trevor Carver, the 1031 is not an option for you at this point.  Your property is not considered investment.  It is  your primary residence and since it is your primary residence your only option to avoid recognition of that gain would be to delay the sale for a few months.

Since the money from that will be tax free anyway at that point, there is no reason why you can't go ahead and purchase your new property now.  You could even do a refi now and use the cash for the new purchase and rehab - rehabbing it before moving in will make your wife very happy!!!  Trust me on this.

Peter Mckernan · Answer

@Trevor Carver I believe that article covers all U.S. States; however, I would run it by a Utah based CPA prior to making the move.

Peter Mckernan · Answer

@Trevor Carver

It sounds like the property you are selling is not a primary residence, or it is? If the house you are selling is a primary residence, then you will be covered on capital gains up to $250,000 single and $500,000 married. (Check the link below)

http://www.nolo.com/legal-encyclopedia/avoid-capit...

If this is not a primary residence look into 1031 exchange, that would be the best bet to not pay any capital gains, but if that is not an option since it is in escrow, then there is not really any other options to avoid the taxes.

Tanner Christensen · Answer

What about the state? Have you found out how much Utah will require for capital gains? @Trevor Carver

I am in a similar scenario, but I have lived in my home with my wife for over two years. Trying to figure out what hit I I will take from the state..

Thanks

Trevor Carver · Answer

Thanks, @Peter Mckernan. Maybe I can get input form @David K. Loveless or @John Briggs. Do you fellow Utahns have any insight there?

@Dave Foster thanks! How many more months would I have to wait in order to not get the tax hit?

How to Legally Avoid Capital Gains in Utah?

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