Capitol Gains Tax Question

[gverb1219]

What is the name of your state (only U.S. law)? Florida

We have a single family home in Ridgefield,CT.

We moved to Florida and bought our current home 4 years ago. The house in CT has been on the market on and off because of "the market" not being well.
We had a family friend staying in the house for a couple years to save us from going back and forth during winter months in case of weather issues such as we had the first year we were gone (pipes froze).

We just received an offer on the house for approx $310,000. This house was not an "investment property"....we lived in it for close to 30 years before I retired and we moved, it just hadn't sold.
We haven't had it as our primary residence 2 of the last 5 years, if what I read on line about home sales taxes is correct, no capitol gains if under $500,000.

We've put a lot of money into the house over the years with remodeling, new deck, furnace, oil tank, carpets, flooring, etc.....

Do we still have to pay the 15% capitol gains tax on it and is there any way to avoid it?
I believe we were there (my wife) for one year of the last 5 as she lived there until she retired a few months after me.

By the time the realtor takes their cut, fees, etc, etc and we pay off the equity loan we borrowed against it to buy this home....we may be in the minus.....

Any help would be appreciated...

Thank you
Gary

 

[FlyingRon]

First question: did the "friend" who is staying their pay rent?

IRS publication 523 https://www.irs.gov/pub/irs-pdf/p523.pdf gives you a lot of good information.

Yes, you owe capital gains tax on the difference between the basis and the sales price. The basis is the price you paid plus any capital improvements made to it as well as any expenses you had for the sale.

Certain remodelling, adding the deck, etc... may well be considered capital improvements. Things that are just repairs, don't increase the basis. Your real estate commission and anything you did to sell the house (painting, cleanup, staging) also add to the basis.

What you have to pay off for the mortgages and equity loans are not part of the basis/capital gain calculation.

 

[LdiJ]

First question: did the "friend" who is staying their pay rent?

IRS publication 523 https://www.irs.gov/pub/irs-pdf/p523.pdf gives you a lot of good information.

Yes, you owe capital gains tax on the difference between the basis and the sales price. The basis is the price you paid plus any capital improvements made to it as well as any expenses you had for the sale.

Certain remodelling, adding the deck, etc... may well be considered capital improvements. Things that are just repairs, don't increase the basis. Your real estate commission and anything you did to sell the house (painting, cleanup, staging) also add to the basis.

What you have to pay off for the mortgages and equity loans are not part of the basis/capital gain calculation.

I disagree with you. It was their primary residence for two of the last 5 years. Therefore they would be entitled to the 500k capital gains exclusion for a married couple. The exclusion would be prorated if the home was actually a rental for 3 years, and a prorated capital gain, but that is all.

 

[FlyingRon]

I disagree with you. It was their primary residence for two of the last 5 years. Therefore they would be entitled to the 500k capital gains exclusion for a married couple. The exclusion would be prorated if the home was actually a rental for 3 years, and a prorated capital gain, but that is all.

You've lost me. They haven't lived there 2/5, they even stated that. They have only lived there 1 out of 5 (they moved out FOUR years ago).

 

[LdiJ]

You've lost me. They haven't lived there 2/5, they even stated that. They have only lived there 1 out of 5 (they moved out FOUR years ago).

You are right, I completely misread that. For some reason I had it in mind that the FL house was not their primary residence to start with.

 

[gverb1219]

First question: did the "friend" who is staying their pay rent?

IRS publication 523 https://www.irs.gov/pub/irs-pdf/p523.pdf gives you a lot of good information.

Yes, you owe capital gains tax on the difference between the basis and the sales price. The basis is the price you paid plus any capital improvements made to it as well as any expenses you had for the sale.

Certain remodelling, adding the deck, etc... may well be considered capital improvements. Things that are just repairs, don't increase the basis. Your real estate commission and anything you did to sell the house (painting, cleanup, staging) also add to the basis.

What you have to pay off for the mortgages and equity loans are not part of the basis/capital gain calculation.

**************..basically.....they only paid what it cost to maintain the house.....there was no "profit" made and we still had to kick in a portion to pay the property taxes and insurance. They paid for heating oil, water, electric, phone, etc....those types of expenses were in their name......there was no "formal" rental agreement.....just signed document what they would be responsible and us.

So if I understand you....we replaced the 12 x 24 ft deck, we had the chimney rebuilt, new roof, aluminum trim around all the windows and roof line, rebuilt old rotted (attached) garage, replaced furnace, replaced oil tank, painted entire inside, new carpets in 3 rooms, finished attic,......are deductible? Sounds very confusing....I feel I will have to find a tax person, as much as I'd like to do them myself.....I just don't want any mistakes where the IRS will coome after me.....
I will read that article you posted....thanks
Gary

 

[gverb1219]

I will read that article you posted....thanks
Gary

..I think my head just exploded.....definitely need to be a tax lawyer to understand most of that.....uhg....

 

[LdiJ]

..I think my head just exploded.....definitely need to be a tax lawyer to understand most of that.....uhg....

I think that you are going to want to use a tax professional this year. Just make sure that you provide information regarding what you originally paid for the house, the copy of the closing paperwork for when you sold the house, and as much detail as possible regarding improvements you made to the property. You will of course, need the rest of your normal tax paperwork as well.

If you see someone before the end of the year they may be able to give you a rough idea of how much money to hold back from the proceeds to cover the taxes. However, if there are no proceeds due to the equity loan, that does not mean that you did not have a capital gain. It doesn't automatically mean that you did either, but since you owned the house for 30 plus years, odds are that you did have some capital gain.

 

[FlyingRon]

The reason I asked is that if they were actually a bona fide rental situation, then there are depreciation and depreciation capture issues to be worked out as well. Also, even if you don't net a gain from the rental (and note your debt service other than the interest isn't an expense in the rental) that needs to be declared. If you were allowed to depreciate you are required to recpature the depreciation even if you didn't take it. That being said, when you have a real property with some capital gain (other than what is totally excludable as a primary residence), it usually behooves you to pay to have a tax professional do the math.

Yes, take all your recepits and for what. Anything that could be considered an improvement adds to the basis. Anything that's just a repair isn't (though it may be expensable against your rental income).

So fixing the roof isn't likely a capital gain but putting a better roof on is. Replacing a dead furnace may be considered an improvement as the newer ones are likely to be an improvement (better effiiciency) over what you had. Lawn care is not an improvement, but if you're selling the house and you have someone come in and mow and water and freshen up the flowers or whatever to make it attractive for the sale, that's probably a sale expense that can be counted.


I've not known the IRS to quibble much provided you have reasonable documentation.

 

[gverb1219]

Just make sure that you provide information regarding what you originally paid for the house,

The house was left to my wife after her father passed away, so not sure if that makes a difference. I'm pretty sure it was worth quite a bit more back in 2007 than it is now. Before the market in CT fell out I believe it was in the $450 to $500,000 range......

 

[davew128]

The house was left to my wife after her father passed away, so not sure if that makes a difference. I'm pretty sure it was worth quite a bit more back in 2007 than it is now. Before the market in CT fell out I believe it was in the $450 to $500,000 range......

Very relevant information to provide to your preparer next year. I don't know that you will end up with a deductible loss but quite possibly a non-deductible loss which is better than a taxable gain.

 

[FlyingRon]

The house was left to my wife after her father passed away, so not sure if that makes a difference. I'm pretty sure it was worth quite a bit more back in 2007 than it is now. Before the market in CT fell out I believe it was in the $450 to $500,000 range......

If she inherited the house, the basis steps up to the fair market value at the time of the death. If the house is worth less than that now, you don't owe capital gains (though in your situation, you probably can't do anything taxwise with the loss).

 

[gverb1219]

Very relevant information to provide to your preparer next year. I don't know that you will end up with a deductible loss but quite possibly a non-deductible loss which is better than a taxable gain.

If she inherited the house, the basis steps up to the fair market value at the time of the death. If the house is worth less than that now, you don't owe capital gains (though in your situation, you probably can't do anything taxwise with the loss).

**************thanks guys.....that sounds hopeful**************more worried about the capitol gains tax than deductible or non deductible loss.

My wife usually does our taxes, but when the house sells I would rather have a pro do it. Do you think I should search out a private tax person or would a place like H R Block know all this.....

 

[STEPHAN]

capitol gains tax

That's a nice one.

 

[LdiJ]

**************thanks guys.....that sounds hopeful**************more worried about the capitol gains tax than deductible or non deductible loss.

My wife usually does our taxes, but when the house sells I would rather have a pro do it. Do you think I should search out a private tax person or would a place like H R Block know all this.....

I would tend NOT to use one of the national chains for this. While they usually have some good people in each office they also have people that just passed a 12 week training course. Look for a smaller local office and ask lots of questions ahead of time. You might even ask friends and co-workers for recommendations.

Call around. Explain that you have income tax issues regarding real estate to deal with and ask who in their office would be best able to handle it. Then, speak to that person and ask detailed questions. Do it now. The tax practices with the best people tend to be open year round and their best people tend to work year round.