First Time Home Owner here and looking for some sage real estate advice from Aggies who know more than I do.

Wife and I built a house in West Houston/Katy area and we closed on the house 11/30/2020. During the whole process, I was laid off bc of Covid. I have since been able to find a job in The Woodlands with great hours, decent pay, and good work-life balance. We are now looking to move so that I can be closer to work and spend more time with our 15 month old son. I have read in several places that in order to avoid paying capital gains taxes on the sale of my home, I need to live in this "primary residence" for "two of the last five years." The only exception to this would be if it was an "investment property" and I used the gains to pay for the next investment property. My question is: Is there a way to use the money I gain from selling my house (primary residence) and using it as a down payment for our next house while avoiding paying the "capital gains tax? Or is it just better for me to wait the two years since that will be this November anyways?

Hopefully I have been able to convey my situation as clearly as it sounded in my head. Any help or suggestions would be greatly appreciated.

have you lived in the house for two years?

In November, we will have lived in the house for two years.

YNWA.2013 said:

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In November, we will have lived in the house for two years.

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Keep in mind, the two years is based on when you close on the sale, not when you receive a contract....so, if the closing process is 30 days, you would want to go under contract toward the end of October...that's just over 3 months. If you can delay the sale just that slight amount, it could be worth it (I don't know your numbers, but you can run them).

We closed on 11/30/2020. But I see what you're saying. Delay the process until October and just time the closing date to be after 11/30/2022 and we should be good. Thank you!

Where in Katy is the house and where in the Woodlands is your new job? You can make a partial exclusion since it's a work related move. As long as your new job is at least 50 miles from your old house.

(# of months lived / 24) x $500,000 = how much you can exclude

Martin Q. Blank said:

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Where in Katy is the house and where in the Woodlands is your new job? You can make a partial exclusion since it's a work related move. As long as your new job is at least 50 miles from your old house.

(# of months lived / 24) x $500,000 = how much you can exclude

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You can also use other qualifiers for this exclusion with this like medical hardship or other "hardships" due to unforeseen circumstances like job loss.

https://www.journalofaccountancy.com/issues/2009/nov/20091783.html

And depending upon your appreciation - you can also use a cash out refi to protect the proceeds from capital gains. For example, if you have a house bought for $300K that is worth $500k today - you can get a cash out refi loan of $400K and basically pocket that $100K. When you go to sell your house, your paying back a loan and reducing your capital gains burden. Reason being is because cashout refis are not taxed and the proceeds of a sale go to pay back that loan. This is a costly and lengthy option however, so I don't know if it would be perfect for your situation.

Contingent sell of the house, using proceeds for down payment, would probably keep you out of capital gains.

But woodlands to Katy is not gonna be 50 miles.

OnlyForNow said:

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Contingent sell of the house, using proceeds for down payment, would probably keep you out of capital gains.

But woodlands to Katy is not gonna be 50 miles.

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I just mapped my distance to my friends house in The Woodland and I'm in Katy and it is over 50 miles around 99. Going into Sam Houston makes it closer to 60 miles.

I'm not your CPA so please consult with yours but I believe the rule says something to the effect of the shortest of the commonly traveled routes. I might be able to get it a hair under 50 by weaving a bunch of backroads through Tomball or something but that's no "commonly traveled" IMO.

Edit: you also need to factor in distance from of new house to the office as effectively add that to the 50 mile test.

CPA is right.

Lots of Katy to The Woodlands is over 50 miles; some isn't but I don't know the strictness of the rule, or is as he said you'd need to add-in the drive to work from new home.

Y'all wanna get set up before school starts in the woodlands, so waiting will November is probably a 'no-go' solution, right?

I mapped it out this morning and the drive from the door of my house to the door of my job is 42.3 miles.

We only have the one son who is 15 months old so we are not really in the school time crunch yet. Daycare is what we would be looking at and getting on a waitlist somewhere for that. So our timeframe is somewhat flexible.

I didn't see anything about a timeframe for the "Unforeseen Circumstances" to qualify but I would imagine there is. I was laid off in July 2020 and started this job in October 2020. So it has been close to two years on that front.

In terms of the cash out refinance, I have read about this before when I was trying to convince the wife that keeping the house and renting it out may be a better long-term option as our neighborhood is "up and coming" with a shopping center set to be opened less than 2 miles from our house. Target is scheduled to open at the end of the year with Burlington, Marshall's, and HEB sometime in the next year or so. In addition to a Harmony Public School around the corner and Katy ISD purchasing land for a middle and high school to complement the elementary school that is already in our neighborhood. But she thinks (and I understand this sentiment as my parents rent out homes) no one takes care of your home like you would and renters are not worth the headache. We do not currently have a CPA (but would be open to any recommendations or connections y'all may have in the area), but I will look into option further.

We have been looking at HAR at homes in the areas we like, but have not been able to find one that we like that matches our current family needs. The ones I have found seem to always be "Under Contract - Pending" before I can even show my wife and get a showing. So we will keep on looking and hope that what I am reading about the market slowing down is true and homes are on the market for a tad longer. (Except when I put my house on the market, I hope it still sells/rents quick lol)

We had the same experience. It may be worth your time to work with a buyer's agent who specializes in the area you want to buy in. We had people look at our house before it went live on HAR because our seller's agent knew a lot of buyers/buyers agents looking in this area. Ultimately, the house sold to one of those people.

I stand corrected. Just the proceeds from the cash out are not taxed.

Here is the full exclusion and IRS publication on capital gains/selling a home.

https://www.irs.gov/pub/irs-pdf/p523.pdf

Martin Q. Blank said:

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Also, I'm not a lender, but you may have issues finding a loan for the new house with such a short history with your new job. Those rules seem to change a lot.

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My wife and I just closed on a house about two weeks ago. We both just started new jobs in November of 2021. We were worried about this when initially shopping for a loan, but lenders didn't care at all. I was a bit surprised, but I think they're more concerned about overall work history instead of history of your current job.

I don't believe it's an issue of caring or not. If it's the same industry or related field it's not an issue. If there's been a gap in employment that's reasonable and explainable that also isn't an issue.

So you cannot roll in equity into new house and avoid capital gains unless you have owned for at least two years?

Need to me. (Was wanting to sell our 1st house) and move to smaller town Texas but 2 year anniversary is October 28.

What if it's a "second home?" Same two year rule or are there other restrictions on second homes and cap gains taxes?

How much has your current home appreciated since you bought it ?

RGRAg1/75 said:

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What if it's a "second home?" Same two year rule or are there other restrictions on second homes and cap gains taxes?

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A second home, by definition, is not your primary residence so none of these exclusions from paying capital gains taxes would apply.

htxag09 said:

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RGRAg1/75 said:

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What if it's a "second home?" Same two year rule or are there other restrictions on second homes and cap gains taxes?

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A second home, by definition, is not your primary residence so none of these exclusions from paying capital gains taxes would apply.

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So 1031 to defer? Or do second homes not qualify for those?

It's a "new build" where our all in (including upgrades) was ~$330,000. Looking at the website, if you want to build our floorplan, the base price is $530,000, upgrades not included. We are also on an oversized lot (~11,500 sq ft).

so wait until Nov but what's the house going to cost in the woodlands? $700k?

YNWA.2013 said:

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It's a "new build" where our all in (including upgrades) was ~$330,000. Looking at the website, if you want to build our floorplan, the base price is $530,000, upgrades not included. We are also on an oversized lot (~11,500 sq ft).

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You could use a company like Ribbon or Upequity where they buy the home for you with cash and then you rent it for up to 6 months as $X price and then buy it from them within those 6 months for the original purchase price.

That might good to avoid the capital gains tax which can only be applied if 1. The home was your personal residence for the last 2 out of 5 years 2. You haven't claimed the deduction in the last two years.

My only reservation is:

1. The typical costs when I last looked at it was 2% of the new buy purchase price. So you're going to pay but just less of it towards taxes, unless you'd use Red Pear where you can throw that 2% rebate towards that costs.

2. You're going into a cooling housing market. So that can hurt if you wait to sell until at least October because who knows where the housing market is going to be. But I'll tell you from my own personal experience selling my house - it's not fun at the $500K+ range.

Jamie can chime in since he is the one who holds the most brokers license in the most MLS but more importantly - he is a Houston native.

I'm not sure if there's a good way to do what you want before 11/30. Thoughts on converting it to a rental and putting less down on your new home purchase? Nothing wrong with 5 or 10% down. I've never actually put 20% down on a primary residence myself. I think I'd either stay through 11/30 then sell or hold it as a rental and move when you find a new home you like.

Finally, if you do decide to buy and/or sell, I'd be happy to help you. On top of our awesome service and insight, we rep sellers for just 1%, and rebate our buyers as much as 2% at closing.

Why is it more difficult to sell at the $500k range? I understand that the target buyer pool is smaller at that price point

YNWA.2013 said:

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Why is it more difficult to sell at the $500k range? I understand that the target buyer pool is smaller at that price point

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Less likely to have investors in that pool (I'm obviously talking about non-high cost markets where the average median home price is at least $100K below the $500K mark). People buying are typically buying for personal residences. Not always though.

Plus the costs of your monthly note if financing has gone from 3% interest coating you $1680 per month (assuming 20% down for a $400K mortgage) to $2400 at 6%. Plus taxes and insurance would likely make your monthly carrying costs well over $3000.

Yeah, interest rates continuing to climb are gonna be a killer not only when trying to sell my current house, but also when trying to buy the new one. I don't think we are in the worst possible position, but buying a home 10 months ago would definitely have been more ideal.

Listing isn't selling. Don't worry about any of this until you have a buyer on the hook. Everything can be negotiated and written into a contract, but trying to figure it out before there's a buyer is a waste of time and resources.

Plus you'll only owe taxes on the appreciation. Might not be worth the wait in this economy