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What am I doing? We had a potentially large gain on our recent home sale and are rolling some of it into a new house. There is I believe a 500k exemption and the amount of capital improvements we made over the years negate the rest.
To be clear, rolling gain, or any money, into a new house has zero effect on your capital gains calculation.
Yes, you subtract the $500k exemption for a married couple, as well as any improvements made to the house. Improvements does not include repairs. The IRS instructions have the details.
If you lived in and owned the house between one and two years, you will pay short term capital gains but there's no 250/500K exclusion on the profit.
If you owned it and lived in it more than 2 yrs you get to exclude the first 250/500 and pay gains on the rest of the profit.
If you flipped it in less than a year the profit gets added to your regular income, with no special benefits.
Most people end up in the 15% region of capital gains. If you owned a property for it's entire 30 year mortgage period, you have probably seen the value rise a lot. The average person ends up paying the 15% rate (after the exclusion). Plus if you are over 65 you will probably get hit with higher medicare payments for a few years.
And, there is NO rolling profit over into a new home. That went away in the 1990's without much publicity.
If you lived in and owned the house for a year or more you will pay short term capital gains but there's no 250/500K exclusion on the profit.
If you owned it and lived in it more than 2 yrs you get to exclude the first 250/500 and pay gains on the rest of the profit.
If you flipped it in less than a year the profit gets added to your regular income, with no special benefits.
Most people end up in the 15% region of capital gains. If you owned a property for it's entire 30 year mortgage period, you have probably seen the value rise a lot. The average person ends up paying the 15% rate (after the exclusion). Plus if you are over 65 you will probably get hit with higher medicare payments for a few years.
And, there is NO rolling profit over into a new home to be able to avoid capital gains. That went away in the 1990's without much publicity.
If you lived in and owned the house for a year or more you will pay short term capital gains but there's no 250/500K exclusion on the profit.
That is incorrect. If you own a house for over a year any profit would qualify as a long-term capital gain. Also, for a long-term capital gain it doesn't matter whether or not you lived in the house.
That is incorrect. If you own a house for over a year any profit would qualify as a long-term capital gain. Also, for a long-term capital gain it doesn't matter whether or not you lived in the house.
Yup. Usually it's easiest to think of the capital gains tax rate and the capital gains taxable amount as two independent values.
The rate (0,15,20,your tax bracket) is purely based on when you bought the asset and when you sold it. If that duration is less than a year, then the gain is taxed as regular income and the actual rate depends on what tax bracket you are in for that filing year (including the gain as income). If that duration is a year of more, then the gain is taxed at either 0, 15, or 20 percent depending on your income (where your income does _not_ include the gain).
The amount that is considered the actual "gain" is more complex as it depends on several different factors (e.g. have you owned the home for 2 years or more, improvements, etc). It could range anywhere from the full difference in selling vs purchase price (not exactly, but close enough for a CD thread) to $0 (and it goes without saying that it could also be a loss).
Example: Assume $100K/year regular income and $100k gross proceeds from the house sale (we'll ignore improvements and some of the other less common scenarios for now)
Scenario 1: Buy and sell within a year
Taxable Income: $200k ($100k regular income + 100k short term capital gain)
2021 Taxes: $64k (32% tax bracket for $200k income)
Scenario 2: Buy and sell > 1 year < 2 years
Taxable Income: $100k ($100k regular income)
2021 Taxes: $39k ($24k based on 24% tax bracket + $15k long term capital gain at 15% LTCG rate)
Scenario 3: Buy and sell > 2 years and primary residence
Taxable Income: $100k ($100k regular income)
2021 Taxes: $24k ($24k based on 24% tax bracket + ($15k long term capital gain - $250k exclusion = $0 net gain))
Should go without saying but the above is greatly simplified and there are a whole raft of other variables that play into how much one would truly owe in taxes, pay in additional mortgage interest/property tax (and how much of that one can further deduct), etc, etc. This is just for illustrative purposes.
Last edited by austinnerd; 07-19-2022 at 12:36 AM..
To be clear, rolling gain, or any money, into a new house has zero effect on your capital gains calculation.
Yes, you subtract the $500k exemption for a married couple, as well as any improvements made to the house. Improvements does not include repairs. The IRS instructions have the details.
3 renovations/additions, multiple landscapings/hardscapings, 2 kitchens, I've got 1.4m I can show if needed. Rolling was the wrong word I guess.
That is incorrect. If you own a house for over a year any profit would qualify as a long-term capital gain. Also, for a long-term capital gain it doesn't matter whether or not you lived in the house.
You are correct. I had edited and accidentally erased part of the comment. I was referring in that paragraph to the situation of owning and occupying in that range between one and two years having different rules than after two full years. Apologies.
Thanks for all of the info! I'm not looking forward to writing that check but much better than the alternative of losing money on the sale.
Actually, sometimes losing money is the better option. I sold a waterfront lot last year that I had purchased in 2013 for cash. We (my CPA and I) handled it as the sale of an investment property, which meant it ended up as a long-term capital loss once everything was deducted. I have two more years of rollover losses to apply to my income - every little bit helps.
Actually, sometimes losing money is the better option. I sold a waterfront lot last year that I had purchased in 2013 for cash. We (my CPA and I) handled it as the sale of an investment property, which meant it ended up as a long-term capital loss once everything was deducted. I have two more years of rollover losses to apply to my income - every little bit helps.
Yes, while an investment loss can offset other income, a loss on the sale of a primary residence (as is the OP's situation) would not be deductible in any fashion.
As I understand it, I will have to pay capital gains on any amount over $250,000 in gain on my primary residence (minus improvements, sales costs, etc). According to what I've looked at it is 0% for incomes up to 40,400, 15% for $40,401 - $445,850 and 20% for higher than $445,850. But does that apply to the sale of a house. In other words, if someone were retired, what would they pay, zero or 15% because the gain is "income"?
For zero capital gains tax, it is $40,400 of ordinary income not including qualified dividends or capital gains). Look at the Qualified Dividend and Capital Gain Worksheet in the 1040 instruction book.
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