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We are planning on moving next Spring and I had some questions about the law as it relates to capital gains taxes on real estate. We have two properties that we're selling:
1. Our primary residence: We have lived here for 9 years. We hope to make about $80K off the sale of it. From my understanding, that profit would be tax free...correct?
2. Recreational Property: We have 30 acres and a small cabin (not a home) in another state (MO). We have owned it for about 3.5 years now and should make about $65K. Since that is not our primary residence, what type of tax will we need to pay on that profit? We own the property outright, so there is no lien/mortgage on it. When we sell, how much of what we get for it will be taxable and how do we figure that out?
Location: Stuck on the East Coast, hoping to head West
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Read IRS pub 523. If you don't understand it, get a good cpa.
You'll need copies of your home records in order to determine your basis in both. Did you ever use either as a rental or office and claim depreciation?
What are you doing with the proceeds? Section 1031 exchange may be an issue.
Of course, you'll also have to check state law regarding home sales.
We never rented or used either property other than for ourselves. Our primary residence is what my family and I lived in since 2008, nothing but a regular home and mortgage. The other property was only used as a recreational spot for my family to camp out and relax. We paid cash for it and own it outright.
Quote:
Originally Posted by bande1102
Read IRS pub 523. If you don't understand it, get a good cpa.
You'll need copies of your home records in order to determine your basis in both. Did you ever use either as a rental or office and claim depreciation?
What are you doing with the proceeds? Section 1031 exchange may be an issue.
Of course, you'll also have to check state law regarding home sales.
the cabin is prorated if you make it a primary and then sell it .
under the tax rules introduced in 2009 for rentals and recreational property ,you take the total ownership time and divide it by the time it is your primary . that percentage is what you get of the 250k exclusion if single or 500k if married .
as far as taxes if it isn't your primary ? that depends on total income .
capital gains taxes can run from zero to almost 24% depending on other income .
large gains can also trip the amt penalty as well on all other income .
we sold a property and hit the 24% capital gains tax as well as a 16k amt tax penalty .
if you have a state tax they may not recognize special capital gain rates .
Don't forget state income taxes. Probably none on your residence if the state follows the Federal laws. Second home, either 15% or 20% depending on your income for the year,
most states don't know from capital gain rates . your income is taxed at whatever level it is . only the federal applies a special tax rate .
federal can run from zero if you are in the 15% bracket to almost 24%.
however that my not be the final number if you trip the amt penalty . all our capital gains on our investment properties tripped the the amt .
i would not even attempt to guess at anyone's taxes .
under the tax rules introduced in 2009 for rentals and recreational property ,you take the total ownership time and divide it by the time it is your primary . that percentage is what you get of the 250k exclusion if single or 500k if married .
the pro ration of the exclusion is for when the time of ownership requirement isn't met due to health, employment or "unforeseen circumstances".
In the case of a conversion of use, the gain itself is pro rated between the period of nonqualified use and qualified use.
A subtle but important distinction since the gain attributable to the period of nonqualified use would never be able to be excluded but under a pro ration of the maximum amount of exclusion, it potentially could be.
the pro ration i talked about is exactly what you are saying .
this is what i said . "under the tax rules introduced in 2009 for rentals and recreational property ,you take the total ownership time and divide it by the time it is your primary . that percentage is what you get of the 250k exclusion if single or 500k if married ."
that has nothing to do with health , or employment . that is something totally different and it is nothing new that was put in place in 2009 .
op will not understand qualified vs not qualified use . but he will understand recreational use vs primary use
Last edited by mathjak107; 07-10-2017 at 04:28 AM..
Let’s take an example. Married couple owns a property for 10 years, 3 years recreational and 7 years primary (did I get the lingo correct?). They sell it for a $300k gain.
Under your interpretation, they would be entitled to 70% (7 years primary divided by 10 years total) of the $500k exclusion or $350k. Since the gain is $300k which is less than $350k exclusion available, none of the gain is taxable.
Under the law, the result is the $300k is allocated 70% or $210k to primary and 30% or $90k to recreational. The $210k is excludible since its less than the $500k exclusion they are entitled to and the $90k is taxable.
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