Real Estate Property Sold Question

[Cal166]

I was speaking to my co-worker earlier and was wondering if it's true.

He sold his home back in 2003-4 for a profit of 100K, he told me he was not taxed for capital gain since it was under 150-200k? You also have to live there for more than one year?

TIA

 

[vi edit]

2 years, 250k (500k if you are married)

 

[dfuze]

Isn't there also a provision for rolling it into your next home that helps?

 

[spidey07]

2 years, 250k (500k if you are married)

Yep, and you meet the ownership test - occupied for two years of the last 5, does not have to be consecutive.

 

[s1175290]

Isn't there also a provision for rolling it into your next home that helps?

Not any more. This provision was replaced with the primary residence capital gain exclusion mentioned above ($250K/$500K for single/married folks).

You still have the option for a 1031 exchange, but this applies to property held for investment and/or used in a trade or business. Your primary residence would not be eligible for a 1031 exchange.

 

[dullard]

Like others have said tax on house gain is rarely paid by anyone. First, you need real profit. It isn't just the selling price minus your buying price. You get to first reduce that "profit" by the normal expenses.

For example, suppose you bought a house for $400k and sold it for $900k. That isn't $500k of profit. In reality, that house probably cost $20k in closing costs to buy and another $80k in fees to sell. So, the profit is $500k - $20k - $80k = $400k. You also get to deduct all repairs, upgrades, and similar expenses. You might even be able to depreciate the house cost. Suddenly the gain might be $300k with those deductions. If you were single, you'd pay tax on any net gain over $250k (or so you'd pay tax on $50k). If you were married, you'd pay tax on any net gain over $500k (no tax at all).

I believe that would also likely be long term capital gains, at a 15% rate. So the single person would likely pay 15%*$50k = $7500. That tax paid isn't bad on a $500k gain in price.

The 2-year rule is even bendable if you lose a job or have an other unforseen circumstance.

Considering the average house sells for $178k, a $500k gain after expenses is rare. Only the lucky and the wealthy really have to worry about it.

 

[D1gger]

In Canada, there is no tax on any gains for a property sold that is your principal residence. Very nice when you have been in a house for a while and find that it has gained $400 - $500k in value.

 

[Fizzorin]

In Canada, there is no tax on any gains for a property sold that is your principal residence. Very nice when you have been in a house for a while and find that it has gained $400 - $500k in value.

Yes, but not so nice when you've been in a house for a while and realize you're in Canada.

 

[jme5343]

Yes, but not so nice when you've been in a house for a while and realize you're in Canada.

Hahahaha, a Canada joke, hahahahaha.

 

[mugs]

You also get to deduct all repairs, upgrades, and similar expenses. You might even be able to depreciate the house cost.

AFAIK you can increase your cost basis by the cost of home improvements, but not home repairs and maintenance.

 

[Cal166]

Yep, and you meet the ownership test - occupied for two years of the last 5, does not have to be consecutive.

Another question, say if I buy a house for my parents to live but I will be living and working in another state. Since it's not my primary residence, is there a way around this?

 

[dullard]

AFAIK you can increase your cost basis by the cost of home improvements, but not home repairs and maintenance.

While technically you are correct, it'll be damn hard for the IRS to prove that a new furnace (or oven, water heater, carpet, etc) was a repair and not an improvement. Technically most repairs can easilly be labeled as an improvement.

 

[Demon-Xanth]

Like others have said tax on house gain is rarely paid by anyone. First, you need real profit. It isn't just the selling price minus your buying price. You get to first reduce that "profit" by the normal expenses.

For example, suppose you bought a house for $400k and sold it for $900k. That isn't $500k of profit. In reality, that house probably cost $20k in closing costs to buy and another $80k in fees to sell. So, the profit is $500k - $20k - $80k = $400k. You also get to deduct all repairs, upgrades, and similar expenses. You might even be able to depreciate the house cost. Suddenly the gain might be $300k with those deductions. If you were single, you'd pay tax on any net gain over $250k (or so you'd pay tax on $50k). If you were married, you'd pay tax on any net gain over $500k (no tax at all).

I believe that would also likely be long term capital gains, at a 15% rate. So the single person would likely pay 15%*$50k = $7500. That tax paid isn't bad on a $500k gain in price.

The 2-year rule is even bendable if you lose a job or have an other unforseen circumstance.

Considering the average house sells for $178k, a $500k gain after expenses is rare. Only the lucky and the wealthy really have to worry about it.

Or you live in the SF bay area, LA, or New York. My grandma wouldn't sell her house to move because the sale price would in the $700k range while she bought it in the '60s for nowhere near that. ($20k?) A new house where she was looking to move would be in the $500k range, but after capital gains tax she'd end up with a house payment again. And being a widower, she'd only be able to take $250k, not the $500k. So it was a case of selling a house for $700k, buying one for $500k, and still owing $50k due to capital gains. Under the old rules, it would've been easy and had some cash in the bank. But as it stands, she can't move unless she throws away $300k.

 

[mugs]

Or you live in the SF bay area, LA, or New York. My grandma wouldn't sell her house to move because the sale price would in the $700k range while she bought it in the '60s for nowhere near that. ($20k?) A new house where she was looking to move would be in the $500k range, but after capital gains tax she'd end up with a house payment again. And being a widower, she'd only be able to take $250k, not the $500k. So it was a case of selling a house for $700k, buying one for $500k, and still owing $50k due to capital gains. Under the old rules, it would've been easy and had some cash in the bank. But as it stands, she can't move unless she throws away $300k.

The long-term capital gains tax rate would apply, right? That would only be 15% or $102k, but it's going up to 20% next year. If she's in the 10% or 15% tax bracket (income up to $33,950, or $67,900 if she's a "qualified widow", whatever that means) the capital gains tax would be 0% this year. Even if she was above the 15% tax bracket it might be to her advantage to donate some money to avoid that $102k capital gains tax (going up to $136k next year).

All of those numbers came from Wikipedia, but I think Wikipedia is reliable for this type of information. Of course, have her talk to someone who knows what they're doing.

 

[dullard]

Or you live in the SF bay area, LA, or New York. My grandma wouldn't sell her house to move because the sale price would in the $700k range while she bought it in the '60s for nowhere near that. ($20k?) A new house where she was looking to move would be in the $500k range, but after capital gains tax she'd end up with a house payment again. And being a widower, she'd only be able to take $250k, not the $500k. So it was a case of selling a house for $700k, buying one for $500k, and still owing $50k due to capital gains. Under the old rules, it would've been easy and had some cash in the bank. But as it stands, she can't move unless she throws away $300k.

I said that "only the lucky and the wealthy really have to worry about it". Lets look at your grandma.

1) From the 1960s to 2010, the median house in America went up by approximately a factor of 11. So a person at the median who bought a house for $20k in 1960 would now have a house worth $220k. Your grandma's house is now worth $700k. That is more than triple the gain that the median person in her situation saw. She was lucky to have lived in an area with such a large gain. That is, unless you can somehow prove that she chose that city due to the fact that she knew prices would grow at triple the rate of the rest of the country.

2) She can sell now, move to an apartment and have a cool $600k (I subtracted taxes and real estate fees) in the bank plus whatever else she has in savings / pension / stocks / etc. The average retiree has a $300k TOTAL nest egg. So, right off the bat, if she has nothing else, she has double the wealth of the average retiree.

Even if she won't admit it, she has wealth and had luck. Thus, she needs to worry about this issue as I said above.

And, I believe the long term capital gains rate for people in lower income brackets would probably apply to your grandma. That means, for the years 2003-2007 her tax would have been 5% on the house gain and this year 0%. Lets say her gain was $700k - $20k - $1k (fees to buy the house) - $50k (improvements she has receipts for) - $70k (costs to sell the house) = $559k. Then, from 2003-2007 she'd have to pay 5% tax on $559k - $250k. That works out to be $15,450 of tax. That is hardly a problem for someone with $600k in the bank. This year, she'd pay 0%.

So, no, she WON'T need a mortgage to move to a $500k home. And I have no idea where you came up with the idea that she'd throw away $300k.

 

[JTsyo]

Another question, say if I buy a house for my parents to live but I will be living and working in another state. Since it's not my primary residence, is there a way around this?

Wouldn't having the deed having one of their names on it too help?