Capital gains tax of $250k

jyeh74

New member
Let's say you buy a home for $1m and then you sell for $1,350,000  The capital gains tax is $1,000,000 - $1,350,000 = $350k.  You are exempt as single person up to $250,000 of capital gains.  So how can you avoid paying taxes on the $100,000?  If you did remodeling or landscaping worth, can you deduct that from the $100,000 so you don't pay taxes on it?
 
irvineboy said:
Let's say you buy a home for $1m and then you sell for $1,350,000  The capital gains tax is $1,000,000 - $1,350,000 = $350k.  You are exempt as single person up to $250,000 of capital gains.  So how can you avoid paying taxes on the $100,000?

Find a wife.

But if she divorces you, it will probably cost you more.

Yes, you can deduct any capital improvements.
 
Do interior things like window treatments and flooring and painting count as capital improvements? 
 
Cost basis of home = purchase price + closing costs + upgrades for the home (flooring, paint, window coverings, etc) - credits (from agent, lender, or seller/builder)

Gain/Loss = Sale price - cost basis of home - closing costs (including commission and 3rd party costs) - credits to buyer (if any).

Also, keep in mind that there is only a $1m lifetime gain exemption per individual.
 
USCTrojanCPA said:
Also, keep in mind that there is only a $1m lifetime gain exemption per individual.

Do you have a reference for the $1M lifetime exemption?  First time I've heard of such a rule.
 
Anyone know how strict this is?  Let?s say you paid $60k for landscaping do you just need the final invoice from the landscaper or also need copies of the checks, etc?
 
aquabliss said:
Anyone know how strict this is?  Let?s say you paid $60k for landscaping do you just need the final invoice from the landscaper or also need copies of the checks, etc?

It only matters if you get audited :)

If you did get audited, in an ideal world you would want both the invoice and a copy of the cleared check. That way all of the details are available of the costs that you actually paid.

If you only have an invoice they can question whether you actually paid it. If you only have a check they can question whether some of the items you paid for could be capitalized and deducted.
 
woodburyowner said:
USCTrojanCPA said:
Also, keep in mind that there is only a $1m lifetime gain exemption per individual.

Do you have a reference for the $1M lifetime exemption?  First time I've heard of such a rule.

Looks like they changed the rules where there is no limit on the lifetime gain when the last tax law changes was passed.
 
You can use capital losses from stock sales to offset capital gains. Did you do any tax loss harvesting this year?
 
Dr. CA Real Estate said:
Surprised no one has brought up that a 1031 exchange should be done to begin with to avoid any capital gains

Primary residences and second homes are not eligible for 1031 exchange treatment, only rental properties are. You can convert your primary residence or second home into a rental property for 1 year and then do a 1031 exchange but why do that when you have the $250k/$500k gain exemption.  Exemption from tax from gains > deferral of tax gains
 
He didn?t specify the home?s use in the original post.

You?re also not completely correct and you can get the exemption plus defer the remaining tax with a 1031 on a primary residence
 
USCTrojanCPA said:
Dr. CA Real Estate said:
Surprised no one has brought up that a 1031 exchange should be done to begin with to avoid any capital gains

Primary residences and second homes are not eligible for 1031 exchange treatment, only rental properties are. You can convert your primary residence or second home into a rental property for 1 year and then do a 1031 exchange but why do that when you have the $250k/$500k gain exemption.  Exemption from tax from gains > deferral of tax gains

Technically he could get both the $250k exclusion and a deferral for any gain over the $250k by doing a 1031 exchange. The tax code allows you to pile these two benefits together. Mechanics are tricky though and likely not what the OP is trying to accomplish. To do it he would need to do the following:

1) Live in the house for at least 2 of the last 5 years as his personal residence. This allows for $250k in gain to be wiped out
2) Convert the house to a rental or business property and have it sit that way for at least two years. This allows for a 1031 exchange deferring the gain
3) Purchase a like kind rental/business property. This property needs to be of equal or greater value and you must close on the purchase within 180 days of selling the original

Here's a good piece that explains how to utilize both of these treatments in one transaction:https://www.bradyware.com/combine-home-sale-gain-exclusion-with-like-kind-exchange/
 
A primary residence usually does not qualify for an exchange because it is not used in trade or business or investment. That said, that portion of the primary residence that is used in a trade or business or for investment may qualify for a 1031 Exchange.

Frequently Asked Questions (FAQs) About 1031 Exchangeshttps://www.1031exchange.com/faq/

This makes sense to me. But then, one needs to show the history of that 'corner' in the house has been an investment portion of the house before he/she can carve out 1031 portion form cap gains on PR.
 
ChiKid24 said:
USCTrojanCPA said:
Dr. CA Real Estate said:
Surprised no one has brought up that a 1031 exchange should be done to begin with to avoid any capital gains

Primary residences and second homes are not eligible for 1031 exchange treatment, only rental properties are. You can convert your primary residence or second home into a rental property for 1 year and then do a 1031 exchange but why do that when you have the $250k/$500k gain exemption.  Exemption from tax from gains > deferral of tax gains

Technically he could get both the $250k exclusion and a deferral for any gain over the $250k by doing a 1031 exchange. The tax code allows you to pile these two benefits together. Mechanics are tricky though and likely not what the OP is trying to accomplish. To do it he would need to do the following:

1) Live in the house for at least 2 of the last 5 years as his personal residence. This allows for $250k in gain to be wiped out
2) Convert the house to a rental or business property and have it sit that way for at least two years. This allows for a 1031 exchange deferring the gain
3) Purchase a like kind rental/business property. This property needs to be of equal or greater value and you must close on the purchase within 180 days of selling the original

Here's a good piece that explains how to utilize both of these treatments in one transaction:https://www.bradyware.com/combine-home-sale-gain-exclusion-with-like-kind-exchange/

Yeah it's very tricky and not for the ordinary person to try to pull off by getting overly fancy.  You might get into a battle with the IRS by taking "boot" from the transaction where they may try to tax you on the partial removal of "boot" funds from the 1031 exchange transaction on part of the non-exempt gain and depreciation recapture. Not worth the squeeze in my opinion, I've dealt with the IRS on my commission rebates and it wasn't a fun process because you don't deal with the sharpest tools in the IRS shed on individual audits.
 
USCTrojanCPA said:
ChiKid24 said:
USCTrojanCPA said:
Dr. CA Real Estate said:
Surprised no one has brought up that a 1031 exchange should be done to begin with to avoid any capital gains

Primary residences and second homes are not eligible for 1031 exchange treatment, only rental properties are. You can convert your primary residence or second home into a rental property for 1 year and then do a 1031 exchange but why do that when you have the $250k/$500k gain exemption.  Exemption from tax from gains > deferral of tax gains

Technically he could get both the $250k exclusion and a deferral for any gain over the $250k by doing a 1031 exchange. The tax code allows you to pile these two benefits together. Mechanics are tricky though and likely not what the OP is trying to accomplish. To do it he would need to do the following:

1) Live in the house for at least 2 of the last 5 years as his personal residence. This allows for $250k in gain to be wiped out
2) Convert the house to a rental or business property and have it sit that way for at least two years. This allows for a 1031 exchange deferring the gain
3) Purchase a like kind rental/business property. This property needs to be of equal or greater value and you must close on the purchase within 180 days of selling the original

Here's a good piece that explains how to utilize both of these treatments in one transaction:https://www.bradyware.com/combine-home-sale-gain-exclusion-with-like-kind-exchange/

Yeah it's very tricky and not for the ordinary person to try to pull off by getting overly fancy.  You might get into a battle with the IRS by taking "boot" from the transaction where they may try to tax you on the partial removal of "boot" funds from the 1031 exchange transaction on part of the non-exempt gain and depreciation recapture. Not worth the squeeze in my opinion, I've dealt with the IRS on my commission rebates and it wasn't a fun process because you don't deal with the sharpest tools in the IRS shed on individual audits.

When you say IRS on commission rebates you mean paying outside of escrow and filing the rebate as "unreimbursed business expenses" on Schedule B? This is how I handle some of my transactions but I am lucky to not be audited yet.
 
ChiKid24 said:
USCTrojanCPA said:
Dr. CA Real Estate said:
Surprised no one has brought up that a 1031 exchange should be done to begin with to avoid any capital gains

Primary residences and second homes are not eligible for 1031 exchange treatment, only rental properties are. You can convert your primary residence or second home into a rental property for 1 year and then do a 1031 exchange but why do that when you have the $250k/$500k gain exemption.  Exemption from tax from gains > deferral of tax gains

Technically he could get both the $250k exclusion and a deferral for any gain over the $250k by doing a 1031 exchange. The tax code allows you to pile these two benefits together. Mechanics are tricky though and likely not what the OP is trying to accomplish. To do it he would need to do the following:

1) Live in the house for at least 2 of the last 5 years as his personal residence. This allows for $250k in gain to be wiped out
2) Convert the house to a rental or business property and have it sit that way for at least two years. This allows for a 1031 exchange deferring the gain
3) Purchase a like kind rental/business property. This property needs to be of equal or greater value and you must close on the purchase within 180 days of selling the original

Here's a good piece that explains how to utilize both of these treatments in one transaction:https://www.bradyware.com/combine-home-sale-gain-exclusion-with-like-kind-exchange/

You're forgetting one major piece which is the exclusion is prorated based on the number of years it was your principal residence divided by the total time you owned the property. Also any depreciation you took while it was an investment is now taxable.

Example is if you owned the property for 8 years as a rental and moved in 2 years as primary (satisfying 2 of 5 year requirement), you will only get 20% (2 of 10 years) exclusion. This is to combat this sort of loophole.
 
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