Tuesday, November 29, 2005

Tax Tuesday

Note: I am not an attorney and none of the following should be interpreted as legal advice.
If you sell your primary residence, which has been your primary residence for at least two years out of the past five years, the gain you realize on the sale (i.e. the excess of the sale price over the purchase price (the purchase price being adjusted downward for any depreciation deductions)) is excluded from your gross income to the tune of $250,000. Taxpayers can make use of this deduction once every two years. Contrary to what I represented to my mom the other day, there is no requirement that you reinvest the proceeds into new housing. Thus you can sell your house and use the profits to pay off debts, fly to Hawaii, or by massive amounts of bourbon. I advise any reader interested to check out the actual language of IRC Section 121.

On a personal note, I think this exemption is totally bogus. A better approach, it seems to me, would be to allow a nonrecognition of profits to the extent that the profits are reinvested (or used) into housing. This is the approach taken by sections 1031 and 1033 for exchanges (forced exchanges in the case of 1033) of like-kind property. The benefit (revenue-wise) is that the government still has a chance to collect taxes on the capital appreciation at the time the gain is severed from use for housing. There is no good tax reason to allow home-owners tax free consumption via their $250,000 real estate profit.


Anonymous big brother said...

Perhaps the reason for the law existing as it does might be to benfit military personel who have to move, but will be moving to on post housing. That is my near future situation. I will be making a profit when I sell my house,and I will not have the opportunity to reinvest the money into another house because I will be living on post.

10:21 AM  
Blogger Fishfrog said...

A better solution for military personnel would be akin to nonrecognition of gain from an involuntary conversion of property similar to 1033. That section provides a two year time period in which to reinvest the gain from an involuntary sale of property in which gain is not taxed. We could even extend the non-recognition period to five years.

12:20 PM  

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