Income Tax on Real Estate Sale

What is the name of your state?What is the name of your state? Kentucky

I recently sold a piece of property given to me as a gift to make a down payment on a home. The property sold for $95k, and I used $75k as the down payment on the house, leaving me with $20k. I was able to secure a very low rate mortgage (4.75%), and with rising interest rates, I would like to put the $20k into investments. My fiance' and I are both very young and just out of college, and we would like to have some money put away for the future. My question is, if I put the money I recieved from the sale of the property into investments, will I have to pay income taxes on the $20k since I did not re-invest it in property?

[divgradcurl]

Reinvesting the money is irrelevant to whether or not it is taxed. Here are the questions you need to ask:

1. Have you lived in the house (that you sold) as your primary residence for at least 2 of the last 5 years?

If so, then you probably don't have to pay any taxes, because the sale price is less than the deduction you can take in this case.

2. Was the house a gift, or did you get it through probate? In other words, was the giver alive or dead when you got the house?

3. How much did the person who gave you the house originally pay for the house? And,

4. Did the other owner (or you) make any improvements to the house, and, if so, how much did they cost?

Thank you for your prompt reply.

1. No, I did not live in the house. It was deeded to me for almost 4 years, however, I did not recieve any mail at the address over that time period.

2. The house was a gift from grandparent to grandchild. My grandmother is still alive, however she is now in a nursing home. She lived in the house up until about a year and a half ago.

3. When my grandmother built the house in 1970, she paid approx. $25,000 for the land and the construction.

4. No, no improvements were made. Only regular maintenance (roof, septic system replacement, driveway re-paving)

[divgradcurl]

Okay, now you have enough info to get started. Since the house was sold for $95k, and the basis, or what price the house was originally purchased at plus improvements, is $25k, the gain for calculating taxes is $70k. So, in the year you sold the house, you'll need to recognize a capital gain of $70,000 on your taxes, and pay your appropriate capital gains rate.

You should sit down and talk with an accountant sooner rather than later; you may need to set aside that extra $20k to pay the taxes on the sale of the house. Based on your income, other deductions, etc., an accountant may find a way to minimize your tax burden this year.

If I missed anything, I'm sure abezon will be by to clean up any messes I have left...

Thank you very much for the info! I was under the impression that if one sold property and immediately re-invested the gains into another piece of property, that they were not liable to pay taxes on what was re-invested. I will speak to my CPA ASAP to get the matter resolved, as I don't want to get in trouble with the IRS.

[divgradcurl]

I was under the impression that if one sold property and immediately re-invested the gains into another piece of property, that they were not liable to pay taxes on what was re-invested.

That was the rule at one time. The current rule is that if you lived in the house for at least 2 of the last 5 years, then each spouse can exclude up to $250,000 of the gain from their income (so up to $500,000 of gain for a married couple filing jointly), and there is no requirement to reinvest in another home.

Good luck with the CPA!

[abezon]

Actually that wasn't the rule; it is close to the old rule. The old rule on personal residences was that you didn't recognize gains as long as you traded up & reinvested the entire selling price in the new home. This would not have helped our poster, as the property sold was not a personal residence but an investment property.

When you sell investment property, you have the option of deferring the tax on the gains IF you comply with all the technical requirements of section 1031. (Use a professional facilitator to do it!) This would not have helped our poster because she did not exchange the investment property for other investment property -- she sold investment property & bought personal use property.

Sooooo, poster, save that $20,000 in a fairly liquid account -- 9 month CD or money market fund. You're going to need all of it for taxes next April. And go talk to a tax pro *now*, as there may be time for you to do things to help the tax situation next April.