From: Lexington, SC
Dear TaxMama,
I hope we're not in a terrible predicament here. We built a house in North
Carolina (NC) and lived in for 7 years. Then, we bought a house in South Carolina
(SC) before the house in NC sold, just KNOWING that it would
sell quickly. Ha!
5 months later, we now own two mortgages. We are thinking of moving back home
to NC, as we're really homesick. But we're very worried about the tax implications
of selling this house we're presently in.
We have also thought about taking my husband's retirement fund (which hasn't
grown in years) to pay down the principle of our NC house if we do move back.
His retirement fund is tax-deferred. And these days, he's a full-time doctoral
student (making my teacher's salary our only income. (Talk about a low tax
bracket!) He's young enough to start
over (40).
What sort of penalties would we have to pay? We borrowed a lot of money from
my father-in-law to make a big down payment on the SC house and we want to
pay it back. We were going to use the proceeds from the NC house to pay him.
Help!
Carla
Dear Carla,
Whew! Much too complicated!
But think about this, OK?
If you move back home to NC, you’re going to get a job and work, won’t
you? You have no choice, so ‘Yes!’.
You just might be able to get away with an ‘unforseen circumstances’ allowance
that would let you pro-rate the $500,000 non-taxable allowance on the profits
when you sell the SC house.
Did the house in SC go up in value significantly?
Remember, the taxable profit is figured after sales commissions and sales
costs, which usually amount to approximately 10% of the sales price. Once you
take that into account, will you have much of a profit on the sale? If not,
you have nothing to
worry about.
If you do end up with a taxable profit, start digging through your receipts
for expenses you incurred to fix up the SC house. Find all the costs for permanent
improvements to the house, like the
painting, appliances and window coverings (that remain with the house). Such
things will reduce your taxable profit.
Then, if you still have a profit, try for unforeseen
circumstances.
Please read the explanation here
and
the computation for it here.
But if you do have to pay taxes, well…the rate will be your regular
tax rate for both IRS and the state. Unless you find a way to drag out the
sale so the escrow doesn’t close until after you’ve
been in the house for over 1 year.
If you can accomplish that, you’ll be able to reduce your tax rate for
IRS, to 15%. You see, you’ll be able to use the long-term capital gains
rate. And SC has a lower capital gains rate, it will apply to you.
You’ll be fine. Don’t worry.
Do what you want with your life. IRS and tax codes shouldn’t be allowed
to destroy your happiness. There’s always a loophole to help.
Best wishes,
Eva Rosenberg, MBA, EA
