Because of my low income, would I not be subject to capital gains taxes if I sell my home?
I have a house in California worth $2,000,000. I have been in the home for more than 30 years. The original cost was $70,000. I spent $50,000 on repairs and upgrades. My total income with Social Security and a small annuity payment is less than $30,000 a year. I have no other income or investments. Because of my low income, would I fall be subject to 0 percent capital gains taxes? Is there a rule determining how large the capital gain is because the home is a personal residence?
Hi! Advisor Kathleen Rehl’s answers your immediate question, and I like to add a thought to expand on selling a personal residence. Home sellers want to make sure that they don’t have a huge tax surprise as a result of the profit they make when they sell their home.
In your case, you are looking at a capital gains profit of almost $2 million, but your current income level keeps you from having to pay a huge tax. For others whose AGI is higher, they may owe cap gain tax on some or part of the profit. Advisor Rehl touches on the Section 121 exclusion that lets a single taxpayer take $250,000 off the profit of the sale of their personal residence ($500,000 for a married couple. That exclusion can take some of the bite out of the cap gain tax on a home sale profit.
Another thing to be aware of for the Section 121 exclusion is that you don’t need to buy another house with the profit in order to qualify for the exclusion. In your case you’ve been in your home 30+ years, so that means you are older like me. Years ago, if you sold a house and made money on it, you did need to buy another personal residence. However, in 2018 you don’t need to use that money for another home.
Best wishes to you, and thanks for writing.
Well, this is an interesting question and certainly made me think. Before I begin, I recommend the regardless of what I tell you, you get an opinion before the tax returns are filed and I would suggest a competent CPA. More directly to your question, capital gains, dividend & interest are tax-free if your taxable income falls within the 10% or 15% bracket. The massive size of your capital gain when brought to the front page of the 1040 will put you into a fairly high bracket subject to the maximum tax on capital gains which at the moment should be about 20% for federal purposes. To calculate the gain, you begin with your purchase price and add to that your improvements which appear to come to about $120,000. At that point, the IRS gives you a $250,000 capital gain exclusion which will bring your cost basis up to approximately $370,000. If we assume for the moment you do sell for $2 million and have normal expenses, you're adjust a selling price will come in around $1,870,000 lees yur basis & capital gain exclusion of $370,000 leave a gain of about $1.5 million. It is my opinion that would be taxed at the 20% rate. I don't know enough about California taxation to know whether they also apply any exclusion but there will definatley be a capital gains tax in California. Again, I'm not a CPA but I do a lot of tax work and I strongly recommend that if you do sell during calendar year 2018, you meet with a CPA PRIOR to the sale to get a more definitive and concise answer. Hope this helps and good luck.
If you are a single filer, the 0% tax bracket annual income limit for long-term capital gains in 2018 is $38,600. If you are married filing jointly, it's $77,200. Based on the information you provided, it appears you would not be subject to paying long-term capital gains. Even if you were over the income limits, as long as you lived in the house for two of the five years before the sale, then up to $250k of profit is tax-free and that doubles if you are married and file a joint return. Here's more info on capital gains on home sales, and here's more info on the rules and exclusions associated with such. There's no rule on the size of the capital gain itself. Hope this helps!
The original cost of your home was $70,000 and you have spent $50,000 throughout the years on improvements and upgrades. The total amount that you have spent on enhancements and improvements, not necessarily maintenance can be added to the basis of your home. As Lili & Kathryn mentioned, if your taxable income falls in the 15% bracket, you would not be subject to capital gains taxes at the Federal level. However, as a CA resident, you would still be subject to capital gains taxes at a rate of 13.3%. The first $250,000 in capital gains would be exempt from both Federal and CA state taxes. Thank you for your thoughtful question. Good luck to you.
If your total taxable income falls in the 15% bracket (in 2018 max income as a single filer $38.7K), all of your capital gain will be taxed at zero on the federal level. However, the state of CA taxes your capital gain at 13.3%, the highest in the U.S. This tax would be on your net profit excluding $250,000.