I spoke with a client yesterday. She had bought a house in January, 2004, in a city that was more affordable than the one she was living. She is a first-time buyer. For the location, the $240,000 price was a good value. Now a year later, she has decided that the new city doesn't meet her needs. She doesn't like the town. The property has appreciated, and she thinks she'll be able to get $270,000 if she were to sell.

Problem is, the capital gains tax exclusion rules, (see IRS publication 523) require a seller to live in the home for 2 of the past 5 years, except for a few exceptions, like a job relocation. Unfortunately, my client circumstances don't fall into a category that will result in an exclusion. Is she forced to remain in the home for another year? No, but she'll have to pay income taxes on the gain.

She's in a 23% tax bracket. So the $30,000 gain (if she indeed can sell it for $270,000) would result in approximately $6,900 in federal income tax. If she were to pay a realtor commission of 6%, the cost to sell will be $16,200. Her plan was to sell it without a realtor, just like she bought it. She'll have to decide if spending $6,900 on selling the house is worthwhile.

My opinion is that she'll be making $33,100 on the sale of a house she doesn't want to live in, and she should do it if living in that city is not where she wants to live. Don't focus on the tax burden, focus on the net profit. These are all estimates anyway. My advise would be to try selling it for a month and see what happens. Worst case she can't sell it. If she receives an offer, then she'll have to weigh whether the gains less the resulting gains tax nets her an amount she's satisfied with. Until she puts her house up for sale and receives an offer, she's just speculating.