In escrow to purchase a short sale, but might relocate for a new job, will I be taxed on capital gains if I sell?

Asked by ConfusedFirstTimer, Los Angeles, CA Wed Mar 20, 2013

I have been in a very long process of buying a short sale townhouse in CA. It's been going on for 6 months and we hope to finally close in the next 30-45 days. However, I might now move from CA to TX for a new job around the same time I was supposed to close on the short sale. I was planning to use the townhouse as my primary residence, but now I won't even have the chance to live in it, but I believe the value is higher than my purchase price.

If I sell the townhouse (after some renovations) for a profit, can I use the proceeds for the sale to purchase a new home in TX where my new job will be without facing capital gains tax on the profit??

I already know about the 2 out of 5 year rule, but none of this applies to me. A 1031 exchange doesn't really fit even if I try to rent the townhouse because the new purchase would be for my primary residence. I don't want to pay capital gains tax, I would rather put all profit into a new purchase where my new job is. Is it possible??

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Maya Sahafi, Agent, Santa Monica, CA
Thu Mar 21, 2013
Capital gains however are not that much and a good accountant should be able to minimize your exposure by maximizing your costs, maybe even use some of your relocation expenses.
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Jodi Summers, Agent, Pacific Palisades, CA
Thu Mar 21, 2013
Sounds like you already know the answer. Your best opportunity will be to consult with your accountant and see if they have any creative suggestions for you.


Jodi Summers
The SoCal Investment Real Estate Group
Sotheby’s International Realty
License # - 01343854
Things do not change, we change. - Henry David Thoreau
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Kathleen Bec…, Agent, Santa Monica, CA
Wed Mar 20, 2013
I would suggest speaking with your accountant. If you purchase your property, then do some renovations, the purchase price plus renovations would be your tax basis. Anything over that, less your closing costs when you sell would be capital gains.

I guess it all depends on how much you put into the property after you close escrow.

If you are considering moving to Texas before the escrow closes, then you may want to review your purchase contract for an out...look at the Short Sale Addendum...which states you must have short sale approval within usually 45 days (refer to the contract) and then there are other contingency periods, which if not met, may give you an out.

Talk to your real estate agent regarding this.

Good luck!
0 votes
Ron Escobar -…, Agent, Beverly Hills, CA
Wed Mar 20, 2013
Your tax question is very complex, and you could answer it under various theories.. is about what you feel comfortable with and what your tax guy would do...

When I was flipping houses I was treating them like inventory and I paid ordinary income tax and not capital gains.

The bottom line is, you want to make income... you have to pay tax. Think about the benefits of having a great infrastructure in our country!

If you want a rehab bid and a discounted listing price, we can talk about it... I may be able to lower your tax exposure by structuring the deal properly... We fix houses for banks and do lots of high end listings in the area.

Ron Escobar, MBA
General Contractor & Real Estate Broker
0 votes
Elizabeth Sa…, , Fort Collins, CO
Wed Mar 20, 2013
Consult with your loan officer and with your accountant to make sure they look at 'your' individual paper work and circumstances and give you advice. I've learned that although scenarios may be similar, the fine print may vary and you have two different scenarios. Good luck! Let me know if you have additional questions.

Elizabeth Sorgen
0 votes
Al Goldberg, Agent, Beverly Hills, CA
Wed Mar 20, 2013

If you bought the condo as an investment and hen 1031 exchanged it into a duplex and lived in one, the 1031 would apply to 50% of the purchase price and 50% would be your principal residence.

Or if you bought a 4 unit, 75% would apply to your 1031 tax deferred exchange and 25% would apply as your personal residence.

You could always move out of the unit, and then buy a home later on and have an investment property and a personal residence.

Call me

Albert Goldberg Broker
"Making Real Estate Fun"
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