Capital gains exemption on primary residence when selling before 2 years of ownership

Submitted by downup25 t3_126ren2 in personalfinance

My wife and I bought our first house in October 2021. I'm reassessing my career goals and the most likely option is to start my own business. Ideally if I did this we would move to be closer to family while the business is getting off the ground.

I know a new job qualifies for a pro rata capital gains exemption when you sell a primary residence, but I can't figure out if starting my own business would qualify.

Does anyone know if starting a business qualifies for the exemption?

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trueworkingclass t1_jeajdsv wrote

Yes, there is a significant tax penalty for selling a house you've owned for less than 2 years. This penalty happens because you will have to pay capital gains taxes on any profits from the sale of the property, even if it was your primary residence. Here are the implications if you sell your home too soon.

The penalty for selling a house before living in it for 2 years is that you won't qualify for the capital gains tax exemption, and you will have to pay a capital gains tax on any profit. If you've owned the home for over 1 year, but under 2 you'll pay long-term capital gains, while if you've owned it for less than one year, you'll pay short-term capital gains taxes.

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alexm2816 t1_jeal30y wrote

The 'new job' exclusion isn't very clear about self employment but does mention you must move so that your place of work is >50 miles FURTHER than your old commute. If your work was regionally tied then you have a shot but if you're WFH then that would be questionable to me.

It's not entirely too hard to justify a partial exclusion using any of the numerous outs in IRS Publication 523.

The particular situation you speak of isn't outlined but would fall under 'other facts and circumstances' to me if you would have experienced hardship without the move based on circumstances you couldn't have reasonably foreseen. Maybe you have an inlaw with health concerns that would fit elsewhere too. Worth a call to a tax expert if you're treading lightly.

Alternatively waiting until october wouldn't be hard given it's likely 12 weeks from listing to closing in even the most ambitious timeline right now.

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downup25 OP t1_jealob5 wrote

Replying to trueworkingclass (#2,490,721)

Thanks for the reply.

I understand the standard two year rule. What I'm referring to are the unforeseen circumstances safe harbor that allows you to sell your house before two years and partially claim the capital gains exemption.

I've read online that a new job qualifies as an unforeseen circumstance, so I'm trying to understand if starting your own business similarly qualifies.

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arc918 t1_jebmcas wrote

The real question is now much potential gain are looking at after you factor in the expenses (real estate commissions, etc.) of selling the house? Sounds like you could likely qualify for a reduced exclusion under Sec 121.

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