Capital Gains & W2 income

San Diego, California
Buying & Selling Real Estate
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Capital Gains & W2 income

Terri P.
Member since 2022 · 14 posts · 6 votes

A scenario from a family member: 

I plan on selling a family home that has appreciated over the last 20+ years. I will talk to a tax attorney. I am considering quitting an unfulfilling job to look into starting a new business in the next year. Given some family circumstances earlier this year, I took a bit of time off work so if I quit soon, I would have made under 48k in W2 income, which would put me in the 0% capital gain tax rate. I did receive about 25k from a life insurance policy. My domestic partner will have me on his work health insurance, we just need to get that started. I am looking for guidance in what else I should be looking at or ask the tax attorney? I would have to quit my job very soon and that is making me both excited and nervous. Anyone dealt with a similar situation? Are there more things I need to consider? Thank you.

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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
1y

@Terri P. Don't let the tail wag the dog. Quitting you job to save on taxes may not be the best idea. It might make sense but talk to a good tax professional.

If you have lived in the "Family Home" for 2 out of the last 5 years there is a capital gain exclusion $250 or $500k depending on filing status. 

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    1y

    @Terri P. Don't let the tail wag the dog. Quitting you job to save on taxes may not be the best idea. It might make sense but talk to a good tax professional.

    If you have lived in the "Family Home" for 2 out of the last 5 years there is a capital gain exclusion $250 or $500k depending on filing status. 

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    1y

    Be mindful that the 0% tax only applies upto that amount including all your income(W-2 + capital gains from sale of real estate).

    A lot of people think that just becuase they make less than $50,000 that 100% of their capital gains would be excluded. You may want to talk to an accountant prior to the sale of the property to confirm what your tax obligation will be.

    [email protected]917-280-8544
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  • Kristen AmbroseBusiness Member
    Accountant · FL · Member since 2024 · 78 posts · 34 votes
    1y

    Sounds like you’re navigating a big transition and doing a lot of things right already by planning ahead and speaking with a tax attorney

    A few things to consider or ask about when you meet with them

    1. Capital Gains Exemption If this was your primary residence for 2 of the past 5 years you may qualify for the Section 121 exclusion which allows you to exclude up to 250K in gains if single or 500K if married filing jointly

    2. Capital Gains Bracket You’re right to look at your taxable income including W2 wages and life insurance proceeds to see where you land The life insurance death benefit itself is generally not taxable but if any of it was interest income it might be Ask the attorney to confirm that part

    3. Estimated Taxes If you sell the house and owe tax you may need to make an estimated payment to avoid penalties especially if your W2 job didn’t withhold enough for the year

    4. Health Insurance and Marketplace Credits Since you’re planning to go on your partner’s plan this may not apply but if for any reason you do end up looking at Marketplace insurance your income level will impact subsidies Ask how your income mix affects this

    5. New Business Planning Talk about how startup costs might be deducted how to structure the business (LLC S corp etc) and whether making a clean break this year or early next year gives you any tax advantage

    6. Retirement Account Planning If you have any traditional retirement accounts and this is a low-income year you might consider a Roth conversion or some other strategy to optimize your tax bracket

    It’s totally normal to feel nervous about a big change like this but you’re already doing the most important thing which is planning proactively

    Happy to talk more if you want help organizing the numbers or figuring out what to ask I work with a lot of people going through life and business transitions like this and it’s all about getting the right pieces in place ahead of time

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  • Jason MalabuteBusiness Member
    Accountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 914 votes
    1y

    The 0% capital gains rate only applies if your total income (wages plus capital gains) falls within the qualifying range. Many people mistakenly assume that if they earn under $50,000, then all of their gains are automatically tax-free, but that’s not the case. Before selling a property, it’s smart to consult with a tax professional so you have a clear idea of what your actual tax bill could look like.

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