Real Estate Capital Gains
We’ll need to formally talk to an accountant about this (we’ll wait until after April 15, so they’ll be less busy), but the basic gist of the capital gains exemption for selling the apartment goes like this:
For capital gains purposes, the sale of the single 2BR/2BA will be considered a sale of something bought in two parts, one with a five-year ownership, the other with a 1-year (give or take, depending on the closing date) ownership. The analogy to the sale of, say, IBM stock bought in two lots is not a bad one; these are co-op shares ultimately. A full exemption would apply to the older apartment. A partial exemption would apply to the new one: we’re getting an exemption because of an unexpected job relocation, and the amount of the exemption would be prorated from the full exemption over the 1-year holding period, as opposed to 2-year period for the full exemption.
From an math/Excel spreadsheet standpoint, it’s easier to assume that both parts of the apartment are exempt, calculate how much of an exemption applies to each part (using the number of coop shares, which is the most obvious and most easily defensible choice) and then calculate the prorated exemption on the new apartment based on the Excel datetime calculation functions (YEARFRAC).
If I close on July 14, 2004 (1 year from the previous closing date) and sell the apartment for the price the Corcoran guy said it’s probably priced at, I’ll pay about $4,000 in capital gains taxes. If I sell for about $50,000 less than the estimated price, then there should be no capital gains taxes. A 1-week difference in the selling date changes the prorated amount by around $400, so a 1-month delay in closing will save me about $1600 in taxes (albeit at the cost of paying mortgage interest and building maintenance for that month, so it’s actually not worth waiting). These calculations don’t take into account the cost of renovations and any another exemption that might come from the local stamp, filing, etc., taxes that are paid on real estate sales.
Here’s a summary on the possible cases where the exemptions would still partially apply, even though we haven’t lived in the apartment for the required two years. Of course, this is all necessary because the New York City housing market is all nuts, and I have significant capital gains on the new apartment.