If we pay x dollars out of pocket in earnest money for a house we want to buy, when we sell our current home can we pay ourselves back that same amount without paying capital gains tax on that amount?

Likewise, if we buy the new home and spend x dollars (out of pocket) on updates before we move in, can we pay ourselves back from the proceeds of the sale of our current home, and not have to pay capital gains tax on that amount?

There are many rules around the sale of your home. Without knowing all of the details, below is a link to the IRS website discussing it.

https://www.irs.gov/taxtopics/tc701

If the steps are met, can exclude $250,000 if single or $500,000 if married.

I'm sure there is probably a way to legally do that. But laws vary so much from state to state that you REALLY should consult a real estate attorney in your state.

James gave you a good link.

Earnest money paid/received has zero to do with any part of this. It's all about basis and sales/purchase prices.

Much more detail in Publication 523. Link

I'd suggest if you're going to have any meaningful gain on a property and don't understand the rules at all, you get someone involved who can give you specific advice. Your second sentence is a clear indicator of this.

quote:

Originally posted by 4x5:
If we pay x dollars out of pocket in earnest money for a house we want to buy, when we sell our current home can we pay ourselves back that same amount without paying capital gains tax on that amount?

Likewise, if we buy the new home and spend x dollars (out of pocket) on updates before we move in, can we pay ourselves back from the proceeds of the sale of our current home, and not have to pay capital gains tax on that amount?

That's not how it works. I think you're confusing elements of a 1031 exchange (which is typically investment property) with a sale of a primary residence.

When it comes to your purchase of a primary residence and sale of your old primary residence, the two transactions are considered separately.

You do, however, get to exclude the first $250,000 of gain from income ($500,000 if filing jointly) if selling a primary residence.

What constitutes a capital improvement on the new property and whether it would be subject to either a write off or depreciation is a conversation best to have with your accountant. I believe the rules differ on a primary residence versus an investment property - I leave those specifics to the accountants!

Unless you made a large profit (over $500,000) on your former home or didn't live there at least 2 out of the last 5 years, there is no capital gain tax.

https://www.irs.gov/taxtopics/tc701

quote:

Originally posted by 220-9er:
Unless you made a large profit (over $500,000) on your former home or didn't live there at least 2 out of the last 5 years, there is no capital gain tax.

https://www.irs.gov/taxtopics/tc701

Thank you - that's what I was looking for.