Are gains from sale of the primary residence taxed at capital gains rate or ordinary income?

4 Replies

I have always thought it was at the capital gains rate, but someone today told me that the gain on the sale of a primary residences is taxed at the ordinary income rate. Can someone clear this up for me? Thank you!

I have never heard that. Long term gains on your house are taxed at capital gains rates. In addition there is an exclusion on capital gains of I believe $250K if you have lived there 2 out of the last 5 years.

If I am wrong I would love to have someone correct me. @Steven Hamilton II ?

Dina Harleth,

Federal Tax free gain of $250k for a single person or $500k for a married couple. After that it is capital gains rates.

@Ned Carey and @Mike Sattem Thanks; that is what I thought also. My financial advisor made this statement to me and I'm trying to figure out how she may have arrived at this conclusion. In the following from the IRS website on the Net Investment Income Tax the word "regular income" is used. Does "regular income" include ordinary income as well as investment income, or does is it synonmyous with "ordinary income"?

11. Does this tax apply to gain on the sale of a personal residence?

The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes. The pre-existing statutory exclusion in section 121 exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.

...

Example 2: B and C, a married couple filing jointly, sell their principal residence that they have owned and resided in for the last 10 years for $1.3 million. B and C’s cost basis in the home is $700,000. B and C’s realized gain on the sale is $600,000. The recognized gain subject to regular income taxes is $100,000 ($600,000 realized gain less the $500,000 section 121 exclusion). B and C have $125,000 of other Net Investment Income, which brings B and C’s total Net Investment Income to $225,000. B and C’s modified adjusted gross income is $300,000 and exceeds the threshold amount of $250,000 by $50,000. B and C are subject to NIIT on the lesser of $225,000 (B’s Net Investment Income) or $50,000 (the amount B and C’s modified adjusted gross income exceeds the $250,000 married filing jointly threshold). B and C owe Net Investment Income Tax of $1,900 ($50,000 X 3.8%).

Example 3: D, a single filer, earns $45,000 in wages and sells her principal residence that she has owned and resided in for the last 10 years for $1 million. D’s cost basis in the home is $600,000. D’s realized gain on the sale is $400,000. The recognized gain subject to regular income taxes is $150,000 ($400,000 realized gain less the $250,000 section 121 exclusion), which is also Net Investment Income. D’s modified adjusted gross income is $195,000. Since D’s modified adjusted gross income is below the threshold amount of $200,000, D does not owe any Net Investment Income Tax.

Originally posted by @Dina Harleth :
@Ned Carey and @Mike Sattem Thanks; that is what I thought also. My financial advisor made this statement to me and I'm trying to figure out how she may have arrived at this conclusion. In the following from the IRS website on the Net Investment Income Tax the word "regular income" is used. Does "regular income" include ordinary income as well as investment income, or does is it synonmyous with "ordinary income"?

11. Does this tax apply to gain on the sale of a personal residence?

The Net Investment Income Tax does not apply to any amount of gain that is excluded from gross income for regular income tax purposes. The pre-existing statutory exclusion in section 121 exempts the first $250,000 ($500,000 in the case of a married couple) of gain recognized on the sale of a principal residence from gross income for regular income tax purposes and, thus, from the NIIT.

...

Example 2: B and C, a married couple filing jointly, sell their principal residence that they have owned and resided in for the last 10 years for $1.3 million. B and C’s cost basis in the home is $700,000. B and C’s realized gain on the sale is $600,000. The recognized gain subject to regular income taxes is $100,000 ($600,000 realized gain less the $500,000 section 121 exclusion). B and C have $125,000 of other Net Investment Income, which brings B and C’s total Net Investment Income to $225,000. B and C’s modified adjusted gross income is $300,000 and exceeds the threshold amount of $250,000 by $50,000. B and C are subject to NIIT on the lesser of $225,000 (B’s Net Investment Income) or $50,000 (the amount B and C’s modified adjusted gross income exceeds the $250,000 married filing jointly threshold). B and C owe Net Investment Income Tax of $1,900 ($50,000 X 3.8%).

Example 3: D, a single filer, earns $45,000 in wages and sells her principal residence that she has owned and resided in for the last 10 years for $1 million. D’s cost basis in the home is $600,000. D’s realized gain on the sale is $400,000. The recognized gain subject to regular income taxes is $150,000 ($400,000 realized gain less the $250,000 section 121 exclusion), which is also Net Investment Income. D’s modified adjusted gross income is $195,000. Since D’s modified adjusted gross income is below the threshold amount of $200,000, D does not owe any Net Investment Income Tax.

The first thing to remember is your financial advisor is NOT a tax advisor.

It is subject to long term capital gains if held for a year plus one day. If it was not it is a short term capital gain.

Long term capital gain rates, 0,15, 20%

Short Term capital gain rates: Ordinary rate.

Your examples are only differentiating between the Net Investment Income Tax and your regular tax rates (capital gain AND ordinary income rates).

Sale of a residence first goes against the exclusion if applicable and then it is treated as capital gains.

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