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Capital Gains

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We are in California

I have no clue how capital gains works and was wondering if someone could help.

My friend bought a house 1 year ago for $195 in a sale/transfer from her parents. It appraised at the time for $250. They put about $20k into it, but a lot of that was labor to a family member under the table. They are now looking at buying a new house for about $450. Since they only owned the other property for a year (they did live in it for 4 years prior to buying it) will they owe a substantial amount it capital gains? They are planning to list the house at $350. Would it make more sense to keep the house and rent it for a year, then sell it?

Any advice appreciated. She is moving ahead very quickly... went house shopping Monday, put an offer in yesterday and put her house up for sale yesterday as well. I just want to make sure she is making the best financial decisions and won't be shocked by the tax outcome this time next year.
 


Can anyone help on this at all?

My friend googled "capital gains tax california" and it came up with "At a combined Federal and California rate of 25%". Is this right?

Would these numbers be about right then?
(guessing on figures here...)
Sell house for $325
Lose 10% (realtor fee, closing costs, etc etc)
= 292,500
Minus 200k for pay off ($195 +5k prepay)
=92,500
Minus 23,125 for capital gains taxes?????
=$69,375

I think they pay about $16,000 a year for the house and property taxes. If they can find a way to swing it, should they hold on to the house for a year then sell? Would it matter that they had already bought a house in the meantime? What would be the best way to do it?
 

SANDBRJ

Junior Member
capital gains...go to IRS.GOV and call an IRS specialist

I'm not going to be a lot of help here but you should try going to the IRS.GOV website. You should be able to find an 800 number to call and speak to a specialist about capital gains. I did this a couple of weeks ago because I spent hours surfing the net and getting more confused. The person answered all my questions. Mine were related to long term capital gains though. The scenario for long term is as follows:
SALE PRICE OF HOME less commissions, less BASIS (this would be the mortgage payoff and any documented improvements). From this you would deduct $500,000 if married or $250,000 if single. This is the 'allowance'. The amount left is what you would be taxed on.
Example
$500,000 (sales price)
- 30,000 (commission)
- 100,000 (mortage payoff+improvements)
------------
$370,000
- 250,000 (if you are single)
------------
$120,000 (amount to be taxed on)
x 15% (this depends on your income level)
------------
$30,000 federal tax due (state tax not included)

**if you were married in this scenario you wouldn't pay capital gains.

Many people think that if they reinvest their profits in another home they don't pay capital gains...this is no longer the case under current tax laws.
 

anteater

Senior Member
SANDBRJ said:
SALE PRICE OF HOME less commissions, less BASIS (this would be the mortgage payoff and any documented improvements)....
Sell house for $325
Lose 10% (realtor fee, closing costs, etc etc)
= 292,500
Minus 200k for pay off ($195 +5k prepay)
=92,500
Just a quick note, guys. You are way off base: mortgage/loan payoffs are irrelevant when figurng capital gain.
 

LdiJ

Senior Member
Brookenstein said:
We are in California

I have no clue how capital gains works and was wondering if someone could help.

My friend bought a house 1 year ago for $195 in a sale/transfer from her parents. It appraised at the time for $250. They put about $20k into it, but a lot of that was labor to a family member under the table. They are now looking at buying a new house for about $450. Since they only owned the other property for a year (they did live in it for 4 years prior to buying it) will they owe a substantial amount it capital gains? They are planning to list the house at $350. Would it make more sense to keep the house and rent it for a year, then sell it?

Any advice appreciated. She is moving ahead very quickly... went house shopping Monday, put an offer in yesterday and put her house up for sale yesterday as well. I just want to make sure she is making the best financial decisions and won't be shocked by the tax outcome this time next year.
She is looking at paying a large chunk of capital gains tax. The only way that she can avoid it is by living in the house for another full year. Renting it out won't help her.

Her basis in the house is 195k plus any money spent in improvements that she can actually prove. I suspect that would just be materials since the labor was performed under the table. If it sells for 350, she is looking at about 150k in capital gains.....which would translate to a significant chunk of tax.

She needs to back off and wait.
 

anteater

Senior Member
SANDBRJ said:
Not true. At least in long term capital gains calculations its used in determining the basis.
(Hmmmm.... a case of the diappearing reply.)

Sorry, but that is not the case. How I finance the purchase of an asset and who gets a cut of the proceeds when I sell it does not affect cost basis.

Think it through. If I purchase a home for $100K with a 15 year mortgage of $80K. 20 years down the road, I have paid off the mortgage. And assume I have not made any improvments that could be added to the basis. And I sell it. Is my basis $0 because there is no mortgage payoff to make?

http://www.irs.gov/pub/irs-pdf/p523.pdf
 
Last edited:
LdiJ, you are always very helpful thank you. You helped me out a lot during the separation stuff and this was good too. Thanks.

Is the 25% she found when she googled probably about what to expect. I couldn't find a difinitive answer on the irs site last night.
 

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