Question: If I have purchased a property (my primary residence) in 2002 and want to sell in 2003, will I have to pay capital gains? I would roll any profit in to a new primary residence. I have heard mixed reports on the two-year live in rule. One said you must live at the property for at least two years to avoid capital gain. The other said you can purchase and sell three properties in five years, as long as you don't exceed a gain of a certain amount. Can you please clarify?

Sue C.

Answer: Both are kind of right...

You MUST live in a property for two years (combined) out of five years. For instance, if you bought in July 1998, moved out and rented the property in July 1999 (1 full year), then you moved back in November 2002 -- you must now live in the house at least till November 2003 (2nd full year) to qualify for the two-year limitation.

Now -- on the money side -- you are allowed to exempt $250,000 from the gain on your home if you're a single person or $500,000 if you're married. This is after you subtract your basis. In essence, you would have to make a whole boat load of money off the house before you would owe taxes. For instance:

Let's say you bought a house for $150,000 in 1998 and it appreciated up to $400,000 by the time you want to sell and you're single. To determine your capital gains liability, you would first subtract $150,000 (which was your basis) from the $400,000 -- you now have $250,000 left over -- voila, no taxes owed. If you sold it for $425,000 -- then you would have $275,000 in gain and would owe capital gains taxes on the $25,000 that's over the $250,000 exempt amount.

(Now, this is the simple look at calculating capital gains. You also get to increase your basis for other qualified expenses -- too numerous to list here.)

All the above is allowed IF you have lived in the house 2 years out of the last five. It sounds like in your situation, you need another year to claim the exemption or you will, indeed, owe capital gains.

For more info, visit www.irs.gov and search for Capital Gains.

Question: I own a house in Washington which has been vacant since July. The current management company has disappointed me by its lack of aggressiveness and laissez faire attitude. Moreover, bills submitted to them for work allegedly done prior to showing seem really excessive. Since I've used them for several years the agreement now is month to month. When is the most opportune time to search for another management company?

J. Fenrick

Answer: Any time you're not getting the service you want from the property manager is an opportune time to search for another management company. My first concern is why your property has been vacant for more than two months during the peak renting season. There are a couple of reasons why a house will remain vacant for that period of time -- either the house is in horrible condition compared to the competition or you're priced too high.

On your question about invoices -- ask for an audit of expenses (you want all the invoices from vendors, fees charged by the property manager for services rendered, etc.) You obviously have a right to this information. If you want to know if the PM company has been taking you for a ride on the fix-up invoices, price out the fix up tasks to a few vendors to see if the cost is within reason.

Published: September 19, 2003

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Mr. Carr has covered real estate since 1989. He is the author of Real Estate Investing Made Simple. Got a personal real estate issue? Post your questions and comments at Anthony’s blog: commonsenserealestate.blogspot.com.