Investment taxes

[Rockemsock]

Been listening (reading) for a few months now, and this is my first post. I’m considering selling my Encinitas condo that i purchased in 2002. But i have a question about taxes.

Let’s say i have 200k after the sale (if i’m lucky…i hear you). And i invest that into some govt. bond or mutual fund or whatever. 10 years from now, i want to buy a home again. What are the tax implications of such transactions…assuming i don’t touch the investment for the entire 10 years. Do i have to reinvest the 200k in order to avoid capital gains taxes? I think i read that it has to be over 500k for that.

Thanks for the help.

[bob2007]

My understanding is that you get up to 500k tax free (24% in CA) if you held the property for 2 years or more. It doesn’t matter where you put it afterwards.

[Anonymous]

The old rules stated that you would have to reinvest.

The new rules (relatively new, but have been around for years..) state that you get 500k tax free gain if you are married, 250k if single if you meet certain conditions. You must have lived there as a primary residence for 2 out of the past 5 years. EG: If you lived there the past 2 years, you are OK. If you lived there 2 years, rented 2 years, and now want to sell, you are OK. When you sell, you get the proceeds and can do whatever you want with them. On your taxes for the year of sale you will pay nothing on the gain if you meet the conditions. If you don’t meet the conditions, there are other options that a CPA can talk you through.

Note: I am not a financial expert, so check with a CPA, but I did sell for a gain last year.

[Rockemsock]

okay, and additonally if my investment in bonds yeilds a 100k profit, don’t i have to pay income tax on that as soon as I sell those bonds and re-invest in a home?

[Anonymous]

Yes, I believe that you do. If you put the $ in a CD and sell, you pay tax on the gain. In a savings account, you pay tax each year it sits there. Anyone know of options to avoid paying tax on the gain of money waiting to reinvest?

[burger007]

I have some money in MARS (Municipal Auction Rate Securities), the gains are tax free but is equivalent to 5-6% CD, but without being locked down on a term to hold it. This is liquid as you can sell anytime without penalty, you just pay the commision like you do when you buy/sell a stock. But they typcially have to be bought in 25k chunks.

[aztecnology]

You live in your primary residence 2 of the last 5 years, and you get 250k single or 500k married.

If you want to invest that money tax free, invest in tax free muni bonds…

For example, not a recommendation:

http://personal.fidelity.com/products/funds/content/FidelityMutualFunds/articles/cal_bond_funds.shtml.cvsr?refpr=zffnews109

http://www.highmarkfunds.com/funds/caintermediate_overview.asp?ItemID=Fund_CaliforniaIntermediateTaxFreeBond

[SD Realtor]

Rule 1 – Never get tax advice from a Realtor…only use it from a CPA

Rule 2 – If you break rule 1 then that is your own fault!

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With that said, if your condo has been your primary residence and falls within guidelines of that IRS definition, (basically if you have occupied it 2 of the last 5 years) you can receive a cap gains exemption of 250k if you are single and 500k if you are married! It doesn’t matter what you do with your profits.

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If you have not occupied the property then your tax basis will be based on the difference of your sale verses when you bought it. Keep in mind that depreciation will be recaptured. If you have other cap gains losses that you have endured or carried from previous years you can write those “against” your gain.

******

So whatever you invest your profit from the home sale in, your tax liability on those gains is 100% independent of the home sale.

[Rockemsock]

thanks for all the info everyone. I am married and have lived in this residence for more than 2 years…so the 500k is good to know.

I’m meeting with my tax man later this week, but was looking for any insight that might be gleaned from this forum. It is good to know that there are tax-free investments other than real estate.

[michael]

Interest earned from investments in taxable bonds (Mortgage backed securities, Corporate Bonds, Treasury Bonds, etc) is taxed as ordinary income. Treasury bond interest is exempt from State Tax.

Municipal bond interest is federal tax exempt and depending on the issuer, specifically the state where the issuer is located, the interest may be state tax free.

Keep in mind that if the price of the bond appreciates and you sell it prior to maturity, capital gains taxes apply. Holding period for less than a year results in short term capital gain, longer than a year, long term capital gain. Capital gains also apply when you purchase a bond at a discount to par and it matures at par.

Interest from mutual funds receive the same treatment depending on the type of interest generated from the fund. Capital gain applies to an increase in NAV at time of sale.

Also, keep in mind that certain Municipal Bond interest is subject to AMT.

Hope this helps.

[Rockemsock]

Thanks Michael, it does help. Now I’m off to check Wikipedia for “discount to par”; “NAV”; and “AMT”. Slowly but surely…I’ll get it.

—-

Well “discount to par” i’m still looking into…hoping it will help my golf game.

NAV- Net Asset Value according to Wiki is a term used to describe the value of an entity’s assets less the value of its liabilities.

AMT- American Musical Theater (no?). Well then, perhaps the Alternative Minimum Tax.

Good to know, thanks. I’m sure everyone else knew this already…but my wife browses this forum as well, and she might find it helpful.

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