Capital gains tax rates?

Question

In 2020 my wife and I plan to test retirement by living off our rental properties. I'll be quitting my 20 hour/wk day job because I think we now have the cash flow to retire. Our income (including wife) will be dropping a lot, from about $110k AGI to maybe $50K from rentals only. We may still dabble in W-2 work, but we're unsure how much. We'd like to qualify for a healthcare subsidy and sell a house capital gains free wihle we're testing our early retirement. We're 40, if that helps.

The question: We have a property we own outright. It's a small house worth about $140K. My capital gain on it has been about $50k in 2 years (foreclosure). If my income is low enough (married filing jointly) in 2020, can I expect to pay zero capital gains taxes? I saw a 2019 chart that said we needed to make under $78K to avoid tax. Am I understanding this correctly?

Thanks!

Ashish Acharya · Answer

@Daniel Dietz,

Yes, Unrecaptured 1250 depreciation (not 1250 depreciation recapture - most likely will not come into play) is also deferred but it is front-loaded each year with every payment. Meaning, you will recognize the recapture gain before recognizing capital gain on the installment sale.

Daniel Dietz · Answer

@Natalie Kolodij, good explanation. Does the 'recapture tax' (not sure of the technical term) due on the depreciation a person taxes always come due in the year of sale, whether they do an outright sale or an installment sale?

I am actually asking as I am working on BUYING a seller financed deal and his small town non-real estate tam man is telling him it is NOT all due in year one, and that it can be spread out. I have always understood, but never done one myself, otherwise - meaning due in year of sale.

I know it would be his issue, but we are talking about almost 400K of depreciation over the years and he is a friend so I dont want him to be shocked :-)

Thanks, Dan Dietz

Natalie Kolodij · Answer

The tricky part is this:

The GAIN from the house goes into your total Income which calculates your capital gain bracket.

So for 2019 to qualify for 0% LT capital gains rates your total income INCLUDING the income from selling the house needs to be under $78k.

An option to making this would would be selling on an installment sale- so that you are only recognizing part of the gain each year, over a few years. Otherwise both your gain from the sale, and income for the year need to be quite low to reach 0%.

Capital gains tax rates?

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