So I'm about to sell my primary residence, if the profit is roughly 450,000, and I am eligible for $250,000 capital gains exemption, it means that I will be paying capital gains on the remaining $200,000.
My question is this: in this scenario does that mean the first $250,000 counts as income which puts me into the tax bracket for 20% capital gains? Which means anytime someone takes the $250,000 exemption, any remaining capital gains would always be 20%?
Accountant · Rochester, NY · Member since 2017 · 36 posts · 20 votes
6y
Hi, Matt! Just to clarify, the gain on your property is the selling price of the home minus your cost basis and selling costs.
In a simple scenario, let's say you had bought your house for $200,000 and incurred no selling costs. You sold the home for $650,000. Under this scenario you'd have a gain of $450,000 ($650k - $200k). I wanted to clarify that because some believe the whole selling price is the gain.
Continuing with this example, you would then subtract the $250k exclusion (or $500k if you're married) from your $450 gain. Leaving you with a $200k capital gain. This $200k is ultimately what flows through to your page 1/2 of your 1040. It flows through via Schedule D as this is capital gain. This whole calculation is completed on Form 8949 and your Schedule D.
Accountant · Rochester, NY · Member since 2017 · 36 posts · 20 votes
6y
Hi, Matt! Just to clarify, the gain on your property is the selling price of the home minus your cost basis and selling costs.
In a simple scenario, let's say you had bought your house for $200,000 and incurred no selling costs. You sold the home for $650,000. Under this scenario you'd have a gain of $450,000 ($650k - $200k). I wanted to clarify that because some believe the whole selling price is the gain.
Continuing with this example, you would then subtract the $250k exclusion (or $500k if you're married) from your $450 gain. Leaving you with a $200k capital gain. This $200k is ultimately what flows through to your page 1/2 of your 1040. It flows through via Schedule D as this is capital gain. This whole calculation is completed on Form 8949 and your Schedule D.
Ryan, yes, I understand all of this. My question is, does the $250K count as income for my tax basis for that year and does this automatically put me in 20% bracket.
Accountant · Rochester, NY · Member since 2017 · 36 posts · 20 votes
6y
The $250k doesn't count toward your taxable income. The capital gains brackets are based of your taxable income. But only the capital gain (so the $200k) will get counted toward your taxable income. As a result, the $250k exclusion won't play a factor into your capital gain tax rate.
If you search "Qualified Dividend and Capital gain Tax Worksheet," that will show you the steps of how the your capital gains tax will be calculated. This may help clarify which numbers get brought into the calculation.
Accountant · Rochester, NY · Member since 2017 · 36 posts · 20 votes
6y
Unfortunately that might be the best way, there aren’t many good calculators online for that analysis. A CPA can run the analysis but that might be a costly option.