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Comment by lisper | Hacker News Reader

It's even worse than that. If your house has appreciated more than $250k (or $500k if you're married) then you have to pay capital gains tax on the rest. And this is a fixed amount regardless of how long you've owned your home, so the longer you stay, and the more your house appreciates, the greater the penalty when you ultimately sell.

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I believe there's a two year minimum to get that capital gains exception, so you'd have to flip every two years.

"Penalty", yeah because people have put in sooo much hard work to make their house values go up. (Sure, some people will spend money on renovations, and there could be tax credits for that. But I don't think that sitting on an asset and letting it appreciate should be a free lunch.)

"Penalty" because someone who sells their house and buys a new one every time it appreciates $250k pays zero tax whereas someone who buys and holds pays significant tax despite having the same net gain over the same time period.

There's a two year minimum that you must hold the home to qualify for the exclusion. So it's not "every time" it appreciates, but it is "once every two years".

https://www.irs.gov/publications/p523/ar02.html#en_US_2015_p...

Seems simple to apply the tax rate pro-rata rather than on a cliff. Then the rule works more fairly and gaming is somewhat limited. Government seems to love rule cliffs for some reason.

Artifact of a pre-digital tax/legal system?

Sure, but that's just another manifestation of the same problem: someone who sells after 23 months and 29 days pays tax. Someone who sells three days later doesn't.

If someone actually tried to execute that sell and buy strategy the large transaction costs would eat up any possible tax savings.

Could one make the case that the liquidity this adds to the housing market justifies the tax savings?

OK, fair point. I think you're right, it should be all or nothing.

I am not a tax expert but I have heard that as long you put the appreciation money back into a house purchase, you can keep all the appreciation upto 500K tax free.

Yup, if married and you've been there a couple of years. $250k if single.

Still, almost anyone who bought a house a few years ago in the area is sitting on at least $500k in gains. So even if taxes on the remainder are arguably fair from a revenue perspective, they are another constraint on housing market liquidity.

There's two scenarios in which one can avoid or delay taxation when his home has appreciated:

1) $250k deduction if single ($500k deduction if married) during the year in which the capital gains has occurred.

2) Convert the property to a business and use a 1031 Like Kind Exchange in which 100% of the profits can be rolled into a new property and deferred until that property is liquidated or the gains are realized.

For 1), you must have owned the home for 2+ year to qualify. If you're moving under 2 years for a "qualified reason" (death, birth of multiples, 50+ miles closer to work) you can take a pro-rated deduction.

For 2), you cannot do a like-kind exchange for residential property that you live in as your primary home.

Yes, thanks for the clarifying points.

For (2), if you convert the residential property into a business by renting it out, at what point can you do a 1031?

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