Q: We are building a home that's nearly completed and have contracted to sell our current home. But now, our plans have changed. If we sell the home we're building, will we owe capital gains tax? B.L., Myrtle Beach, S.C.
A: Yes. To qualify for the home-sale gain exclusion of $500,000 ($250,00 for singles), you must have owned and used the home as your principal residence for two of the past five years. Also, you can use the exclusion only once every two years. And we'd assume that you'd use the $500,000 exclusion on your current home, which is likely to appreciate in value more than the new home.
Tip: You may be able to claim a reduced-gain exclusion on the newly built home (based on the time you owned and lived in it) if you're selling the home for certain "hardship" reasons. In any case, you need to occupy the new home for at least some period to qualify for the gain exclusion tax break.