The Recent Tax Rules on Gains Realized From Flipping Houses- IRS 523
If you're planning to flip your home, it would be best to check the latest IRS information when flipping a house. There are new rules about Capital Gains Tax, which are quite different from the previous Capital Gains Tax deferment rules. Whereas the old system precluded you from realizing gains if you will be flipping houses, IRS now allows you to realize gains if you will be selling a home you own and have occupied for at least two years.
The two-year residency does not have to be on a consecutive basis, as long as it can be established that you had lived in it for a total of 24 months for the past five years preceding the sale,
The new rule is, you can exclude gains realized from selling your house, up to $250,000 if you’re single, or up to $ 500,000 if you’re married, provided you and your spouse file joint income taxes. Any gains in excess of your tax exclusion benefit will be taxable as capital gains, and should be settled within 30 days from the date of sale.
However, it is important certain conditions are met, in order to maximize fully the tax exclusion benefit. The larger the tax exclusion benefit, the less or even zero gains will be taxable for flipping the home. There is also the prescriptive period before you can use the exclusion benefit for another round of house flipping, because you can claim it only once every two years.
Nevertheless, the new rules eliminated the old problem of having to look for a house that could serve and qualify as your “rollover residency", which was part of the conditions of the previous capital gains tax deferment system. In case you're not too familiar about the old system, it contained provisions wherein IRS prevented the house seller from realizing gains if the seller wanted his capital gains tax deferred.
The old tax deferment rules required the home seller to entrust the sales proceeds to an intermediary, usually the real estate agent. The intermediary was tasked to look for a new home for the seller; on the seller's part, he had to buy a new home within a prescribed period. The sales proceeds which were held in trust by the intermediary were applied as payment for the newly acquired home.
It was important that the value of the new home was equivalent to the sales proceeds or even greater. Otherwise, any excess in sales proceeds was reported by the intermediary to the IRS as capital gains of the seller, for which the latter had to pay the equivalent capital gains taxes within 30 days.
Still, the new IRS information regarding flipping a house can be advantageous for those who own more than one property, since they can simply transfer residency after selling the main house. While in observance of the two-year restriction period, they can have the new home refurbished and ready for flipping. Thereafter, the homeowners can put up the property for sale, once the said prescriptive period had elapsed. In fact, the two-year restriction allows you to meet the two year residency requirement.