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Capital Gains On 2nd Property - (Primary Home Exclusion?) - YouTube
Channel: Toby Mathis Esq. | Tax & Asset Protection
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(upbeat music)
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- [Toby Mathis] I bought a home
in 1994 and lived in it
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as a primary residence until 2012.
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It is now a second home, so
it's not your primary residence.
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What are the rules for
capital gains if I sell?
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What do you think there Jeff?
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- [Jeff Webb] Well, normally
we would want it to fall
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under the primary home exclusion
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but that says you have to have lived in it
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for two out of the last five years,
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having been your primary home
two of the last five years.
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It fails in that test,
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so we really need to look
at some other opportunities.
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- [Toby] Yeah, so this is basically,
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if you had sold it in 2015,
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you would have had a big old exclusion.
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You wouldn't have paid
tax on the capital gains:
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single, $250,000; married, filing jointly,
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you would've had $500,000.
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But you waited too long.
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So, it's now just a
regular old capital asset
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and it's subject to long-term
capital gains if you sell it.
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That's if you just sell it as is.
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Long-term capital gains would
be either 0%, 15%, or 20%,
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depending on how much you make.
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It could go as high as 23.8% if you have
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a net investment income tax.
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- [Jeff] Correct.
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- [Toby] What I would suggest,
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and whenever I see this, I always look
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and see how much gain
are we talking about?
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If it's $100,000, then you're
probably just going to sell it,
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and and you're not
going to worry about it,
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but it it's a lot,
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then you either make sure
that you're living in it
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for two out of the last five
years and then you sell it,
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or you convert it into
an investment property.
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You put somebody in it,
and then you sell it
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under a 1031 exchange.
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You exchange it for more real estate.
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So, if it's a second
home, and you're like,
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"Hey, you know it's gone up a lot,
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"and I'd like some rental properties,"
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or, "I want to buy an apartment building,
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"or some condos, or a mobile home."
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Whatever, you could 1031
exchange that second home
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but you have to make it
into investment property.
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TO you make it into investment property,
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how long do you have to rent it for?
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14 days?
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- [Toby] Not very long.
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Really determining if it's
investment property or not
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is what you're using it for.
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Using it as a second
home may disqualify it.
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That may make it a personal.
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- [Toby] Yeah, well it's
definitely right now
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as a second house.
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You have to convert it to
an investment property.
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The question is, I'm going to
have to rent it to somebody,
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and then how long do
I have to rent it for?
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Realistically, you could
do that pretty quick.
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Technically you don't have to rent it.
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You just have to make
it available for rental,
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but I think you'd probably get scrutinized
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if you don't have rents.
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- [Jeff] Right, you really need
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to end personal use of that house.
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- [Toby] I would make
sure that I'm renting it
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probably for six months,
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and then I'd sell it
under a 1031 exchange.
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The other thing you could do,
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at least what my partner
loves to do, is claim,
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is what we look at,
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and somebody just asked,
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isn't intent the key.
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Yes, you can prove the intent.
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In other words, if I list that thing
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to make it available as
an investment property,
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and I show that I listed
it for six months,
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and I could not find a renter.
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The market was just crud, or whatever,
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and I did a good faith effort.
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Maybe I took some applications in,
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and just nobody qualified,
and then I sold it, you'd win.
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It's an investment property,
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but you're probably
going to get scrutinized,
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'cause you don't have any income from it.
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You could still win.
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It's just I try to avoid
having the issue at all.
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The other one you could do,
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is you could sell it under an
installment sale to a S corp,
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increase its basis.
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It's basically getting
installment payments,
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which means part of it
will be returning capital
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taxed at zero, part of it's
going to be capital gains
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taxed at 0%, 15%, or 20%,
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depending on your income,
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and part of it will be interest.
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You spread that out.
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You could do that over 20 years,
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and spread that puppy out,
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and not get a big tax hit,
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and step up the basis
before everybody says,
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oh my God, he set real
estate in an S corp.
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Yep, I sure did.
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This is one of the few
times that I would do it.
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What we're doing is we want a new basis,
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so we can depreciate that thing.
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In the case of an S corp like this,
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if you're going to keep it and rent it,
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and you want to get some of the money out.
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Different strokes, different folks.
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On this one, it really
depends on how much there is.
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If it's a small amount, I
wouldn't mess with any of it.
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If it's $200,000, $300,000,
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then now I'm going to do something
to try to avoid the taxes.
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- [Jeff] Yeah, a small amount,
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you're going to be subject to
the long-term capital gains,
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and it's probably not
going to be that much tax.
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- [Toby] Yep, and it depends
on what your taxable income is.
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If you're in the lower tax brackets,
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you don't really care.
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Yeah, I'll pay a little tax.
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C'est la vie.
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(upbeat music)
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