Capital gains question

13 Replies

I'm about to make over 500k on the sale of my home.  It's been owner occupied for the past 2 years and my income in '18 and 19 has been very low.  Under 20k.

With that low income, can i still be charged capital gains?

I don't think it matters, but I am in California.

Thanks for an info on this.

@Yawiney Yawiney I definitely recommend consulting a CPA. Let me know if you need a few recommendations. 

As stated and straight from IRS.gov, 

"If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. Publication 523, Selling Your Home provides rules and worksheets. Topic No. 409 covers general capital gain and loss information.

Qualifying for the Exclusion
In general, to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule."

However, if you are indeed about to make 500k in capital gains, it would benefit to start looking to investments which would have a depreciation in same year as the gain. Many large acquisitions of real estate or "syndications" pass on depreciation or paper loss to investors of around 30-40% of initial investment.

Example. taking 300k of gains and rolling into a syndication, could equate to 100k in losses to offset taxable gains.

Again, consult a CPA, however could be a method to offset gains in a specific year. 

From this site:

"How to Go Tax-Free on Capital Gains

There is in fact a way to get that coveted zero percent tax rate on long-term capital gains. “Harvesting” capital gains means selling an investment that you know will have a long-term capital gain in years when you will not be taxed on that gain. And that happens when it falls in a year where you are in the zero percent capital gains tax bracket.

This 0 percent tax rate on capital gains applies to married couples with taxable income as high as $78,750, and single filers with taxable income up to $39,375.

In normal years, your taxable income might be much higher than that figure—so the strategy wouldn’t apply. But there are some years when you’re in lower income tax situations. Sometimes you can even force this situation, such as after retirement when you can choose which accounts from which to make withdrawals each year. You might also find those tax-free opportunities if you find yourself temporarily unemployed, or if your income varies dramatically from year to year, as with sales commissions, for example."

I'm really hoping this is going to hold true no matter how much i make on the sale.  I'm single and the past 2 yrs have made under 30k/yr.

@Yawiney Yawiney The amount of your cap gain, above your exclusion, gets Added to your income...that combined number is the number that determines which cap gains bracket you fall into. 

BTW, in case it applies, the full 121 exclusion is Only available if it was always your primary residence...your exclusion is prorated if it was a rental property Before it was your primary. 

Investments and primary residences are not treated the same.

Several people have shared the rules regarding a primary residence for federal tax purposes.

If this was your home for 2 of the past 5 years, you are allowed $250k cap gain exemption as you are single.

Your income level is irrelevant.  But other factors may play if you rented out a portion of your house as a rental and took depreciation.

You need to consult with a qualified CPA to make sure it's all being treated properly.

On the positive side, with over 250k in taxable capital gains from the sale of a primary residence, you should be sure to stash some for the taxes that will be due.  And be sure to check with.a CPA early as you may need to make an estimated tax payment to the Fed or the state of CA.

Does the spouse also need to have had the house as her primary residence for 2 of the past 5 years?  My girlfriend may qualify for that but it's close.  Kind of a weird way to propose, but she might go for it.   

And what about receipts showing the 200-250 that's gone into the place since I've owned it?  I stand to make a gain of 575 (-250) = 325.  So,would the 575 put me in the highest bracket?  In that case I'm looking at having to pay 65k.

I am planning to buy in the next 2 years though so maybe I could put it off by  buying another primary at around the same value?

If you have a 575k Cap Gain from the sale of your primary residence, as a single person, your cap gain exemption of 250k would bring your taxable gain down to 325k. Your addl fed tax at 20% would be 65k. You'd also likely have additional state taxes. And the capital gain tax is a flat tax that is calculated separate from your ordinary income.  So your regular income will be taxed at your regular tax rate.

Buying a new house 2 yrs from now will have no impact on the taxes due on this sale. I believe the Rollover Gain rule you refer to no longer exists as it was replaced by the primary residence capital gain exclusion we've been discussing.

I also think unless they were a co-owner of the house during the past 2 of 5 years, a new spouse won't qualify for the exemption even if the house was their primary.

This is how I understand the rules.  However, every situation is different so, I can't stress enough how important it is for you to consult with a qualified CPA.  

Best of luck.

Thank you @Karen O.  That was very informative.  I'm still hoping my receipts of years of fixes and upgrades that have gone into the property will help me.  I'm talking with my tax guy tomorrow and if he can't help me come up with something I will be contacting a CPA.

@Yawiney Yawiney

It is true that if you are in the bottom two brackets your capital gains tax rate may be 0%
Somethings to be mindful is that the gain from this sale will likely put you over the bottom two brackets.

You also have to factor in California state taxes.